The Concept of Leverage in Forex Trading is the ability to control a substantial amount of money in the forex market with only a relatively small deposit, your margin, in your trading account. With leverage, forex traders have more trading opportunities in the market than they would otherwise require to pay for. Thus, the main advantage of leverage in forex is that a trader can make reasonable to significant profits with only a limited amount of capital.
This guide will explain to South African trading novices the importance of leverage in trading, focusing on key aspects such as:
- What leverage means and how it works
- The application of leverage in trading financial instruments like foreign exchange (forex) and contracts for difference (CFDs)
- The relationship between leverage, margin, and risk
- How South African traders can use leverage responsibly by using FSCA-regulated trading platforms and brokers
- Tips to apply leverage responsibly
10 Best Forex Brokers in South Africa for 2025
Rank
Broker
Review
Regulators
Min Deposit
Official Site
10 Best Forex Brokers in South Africa for 2025
Rank
Broker
Review
Regulators
Min Deposit
Official Site
What Is Leverage in Trading?
It is crucial to answer the question, “What is leverage in trading for beginners?” The main reason is: if a beginner trader does not comprehend the way in which leverage works in trading and does not know what he or she is doing, it can be detrimental to his or her trading capital.
In answering the question, the focus will be on the following aspects:
- The meaning of leverage in trading
In trading, leverage refers to a trading strategy where traders borrow capital from their brokers, enabling them to control larger trading positions while using a smaller amount of their funds as deposits for their trading accounts. Simply put, leverage implies trading with borrowed money, which enhances your buying power as a trader.
For instance, if your broker allows you a leverage ratio (also referred to as leverage factor or multiplier) of 10:1 (also indicated as 1:10), your buying power is amplified 10 times. Thus, if you have a trading account with R5,000 of your capital, your market exposure is R50,000 (R5,000 x 10).
Put differently, if your leverage ratio is 50:1, it means for every 1 ZAR in your account, you can control a position 50 times larger, which equals fifty South African rands (ZARs). Likewise, 200:1 allows you control of R200.
Leverage ratio measures how much you need to borrow from a broker compared to how much margin you need to deposit in your trading account. The ratio will vary depending on the type of market you are trading in, the size of your preferred positions, and the broker you use.
A trusted and regulated broker should play a crucial role in educating traders about the risks involved in leverage and is required to promote responsible trading strategies and practices.
Leverage is popular among retail traders (individuals who buy and sell financial instruments using their own personal funds) because they are allowed to control larger trading positions in the market with a smaller amount of their personal capital.
The availability of leverage to traders (including beginner traders) is a unique feature of forex trading. Forex brokers offer leverage for various reasons, including:
- Entice traders (experienced and novice) to open trading accounts on their trading platforms, diversifying the range of traders and expanding the market base of the brokers.
- Increase trading volumes by allowing traders larger market exposure and buying power.
- Empower small traders to get involved in the forex market, accessing trading opportunities that would otherwise not be available.
- Retention of clients by offering them leverage to pursue larger trading positions and potentially increase their returns.
- Encourage traders to develop risk management strategies because of the risk of losses involved in trading with leverage.
- Leverage multiples both profits and losses
More buying power has the potential of higher profits, but also higher losses. Bear in mind, trading with leverage can multiply both profits and losses. Be careful what you accept as a leverage ratio offered by your broker.
Successful trading with high leverage means outstanding profits. Unprofitable trading with high leverage implies considerable losses. Refer to the subject, “Examples How Leverage Works,” below for more on profits and losses associated with leverage trading.
Examples of How Leverage Works
As a novice in trading, you could ask: “How does leverage work in forex or CFD trading?”
Let us use some examples to answer the question. But let us first explain the term margin, because in trading, the terms margin and leverage are linked.
Simply put, in trading, margin refers to the deposit required in your trading account to open and maintain a leveraged position.
For more on margin and related issues, refer to the subject below: “How Is Margin Linked to Leverage?”
An example of how leverage works in forex trading
Let us say you want to trade the USD/ZAR currency pair and have R2,000 of your capital (margin) available in your trading account and are allowed a leverage ratio of 1:50, enabling you to control a position worth R100,000 (R2,000 x 50) in the market. If the exchange rate between the two currencies moves 1% in your favour, you would generate a return of R1,000 (R100,000 x 1%).
Contrarily, if we take the same example as above, but instead of moving 1% upwards, the exchange rate moves 1.5% against you, causing a loss of R1,500 (R100,000 x 1.5%). Take note that your profit or loss is based on the full value of your position, which is R100,000.
How leverage works in CFD (contracts for difference) trading
Leverage works well in CFD trading because CFDs are about speculating on price movements of financial assets – for instance, shares, indices, commodities, and forex – while you never have to buy or sell the asset. This implies you are not obliged to pay for the total value of the asset of your choice.
You are betting whether the price of a financial instrument will rise or decrease, and you are paid the difference in value if your prediction is correct. The basics of how leverage works are the same for forex trading and trading of CFDs.
The table below shows the impact of leverage at different ratios and when a price movement (upwards and downwards) of 3% occurs:
| 📈Leverage ratio | 💸Margin (Initial capital) | 💷Trade size | 💴Profit on 3% move | ⛔Loss on 3% move |
| 1:1 | R5 000 | R5 000 | R150 | -R150 |
| 1:10 | R5 000 | R50 000 | R1 500 | -R1 500 |
| 1:20 | R5 000 | R100 000 | R3 000 | -R3 000 |
| 1:50 | R5 000 | R250 000 | R7 500 | -R7 500 |
| 1:100 | R5 000 | R500 000 | R15 000 | -R15 000 |
How Is Margin Linked to Leverage?
As already mentioned, margin is the required deposit in your trading account, allowing you to leverage trading. Margin is typically expressed as a percentage of the total value (full amount) of the trade (position). For instance, at a margin rate of 10%, you will only have to deposit R100 to get exposure to the full value of a trade worth R1,000.
(Note: Do not confuse margin with fees.)
Margin is also referred to as:
- Collateral
- Margin factor
- Margin requirement
- Margin deposit
- “good faith deposit”
- Money given to trade on a loan
Margin and leverage are closely related (linked). Margin allows you to open a leveraged trade, increasing your “trading power.” You can trade with leverage without a margin deposit, but this is a strategy with significant risks.
Remember, the margin rate is expressed as a percentage, for example, 20%, while leverage is expressed as a ratio, for example, 20:1.
Besides margin and leverage, other margin terms you will probably see on a trading platform are:
- Margin requirement refers to the minimum amount you must have and maintain in your account, allowing you to open or hold a leveraged position. It is expressed in percentages.
The formula to calculate margin requirement = Trade size (market exposure)/Leverage ratio
For example, when:
- Trade size (market exposure) = R10 000
- Leverage ratio = 10:1
- The margin requirement = R10 000/10 = R 1,000
The table below indicates how margin requirements reflect your leverage.
| 🫰🏻Margin requirement | 📊Leverage |
| 1% | 100:1 |
| 2% | 50:1 |
| 3% | 33:1 |
| 5% | 20:1 |
| 10% | 10:1 |
| 20% | 5:1 |
- Used margin is the amount of money that is currently being used to maintain an open position in the market. In the forex market, when the price of a currency pair changes, the value of the position changes, as well as the margin used.
- Available margin refers to the amount of money that is left in a trader’s account after deduction of the used margin.
- Margin call occurs when a broker requests a trader to deposit more money in their trading account to maintain their open positions, covering potential losses. This happens when the used margin exceeds the available margin.
Pros of Trading With Leverage
There are numerous advantages of leverage trading, including the following examples:
- Access to larger trades, made possible through borrowing from a broker, could lead to high-value trades, potentially enhancing profits.
- Greater market exposure, providing access to more markets, such as forex, commodities, and indices.
- Flexibility allows traders the use of a diverse range of strategies, making it possible for traders to adjust their market exposure quickly and efficiently.
- Increase the buying power of a trader using larger trading positions with less own capital.
- Amplifies profits where small price movements can generate big profits.
- Suitable for short-term trading opportunities.
- Interest-free loan, provided by the broker. (Although some brokers may charge interest on borrowed funds.)
- Allows efficient use of capital by freeing up some funds, using a small available margin without negatively affecting your trade. The freed-up funds can be invested in other low-risk investment options to diversify your portfolio.
- Trading during periods of low volatility, because large trading positions can still generate significant returns during short periods of volatility.
What Are the Risks of Trading With Leverage?
Leverage is an important concept in trading, a powerful tool that can help traders increase their returns. However, it is also a trading tool that can cause huge trading losses and even financial ruin if not used wisely and prudently.
The question, “Is leverage risky in trading?” is indeed a crucial question. Especially when we constantly keep the following risks involved in leverage trading in mind:
- Magnified losses are one of the most significant risks associated with trading with leverage. As previously mentioned, trading results are based on the full trade size and not just on the margin.
- Margin calls to cover potential losses. As already mentioned, if the market starts moving against you, there is a probability that your losses could exceed your margin account. In such a scenario, the broker will send you a margin call, notifying you that you need to add more funds to your account. Ignoring this request, the broker may liquidate your positions, and you could suffer significant losses.
- Lack of proper risk management could lead to dire financial consequences.
- Fast-paced trading can cause stress, leading to emotional trading and impulsive trading decisions.
- Trading with an unregulated broker who operates without oversight of the FSCA (Financial Sector Conduct Authority) may expose traders to various risks like fraud, absence of trader protection, lack of transparency, and potential losses.
How to Use Leverage Responsibly
When trading with leverage, it is crucial to ask yourself, “How do I use leverage safely?”
The following tips can help you in your endeavour to use leverage responsibly:
- Knowledge is power, also in leveraged trading. Learn the basics of leverage trading before you start trading. Staying updated can prevent expensive mistakes.
- Start trading with a conservative (low) leverage ratio, such as 5:1 or 10:1. This strategy will minimise your potential losses while gaining experience. Keep leverage at manageable levels.
- Use a stop-loss order (officially referred to as a “stop closing order”), allowing you to close your existing position when the price of the asset reaches a predetermined price level. A stop-loss is a key trading tool to manage risk exposure on a trade.
- Avoid emotional decision-making, which can lead to poor trading decisions and increased risks. Put differently, trade with discipline.
- Do not take unnecessary risks with your capital. Never risk more than 1 to 2% of your capital per trade.
- Choose an FSCA-regulated broker. Refer to SA Shares’ list of the “10 Best FSCA Regulated Forex Brokers in South Africa for 2025.”
- Start with a demo account to practise on a broker’s trading platform to familiarise yourself with how the platform works. Using a demo account enables you to gain trading experience without risking your own capital.
Leverage Rules and Regulations in South Africa
The FSCA (Financial Sector Conduct Authority) is the main regulatory entity that oversees forex trading in South Africa. It ensures that financial markets are fair, efficient, and transparent. Furthermore, its goal is to protect investors and traders, making sure that they are treated fairly.
The FSCA has implemented strict rules regarding leverage in forex trading. For example, the maximum legal leverage ratio allowed for retail traders is 30:1 (also indicated as 1:30) for major currency pairs and 20:1 (1:20) for exotic currency pairs. These regulations correspond with global standards and aim to protect traders from excessive risks.
Offshore brokers operate outside the authority of the FSCA. Be careful of offshore brokers who offer leverage as high as 500:1 or even 1000:1. This is potentially dangerous. You can search the official website of the FSCA to check whether a broker is licensed to operate as an FSCA-regulated broker.
Conclusion
Yes, certainly, as long as you are aware of the trading risks involved. Remember, leverage is powerful, but dangerous.
Keep the following guidelines in mind when you enter the world of leverage trading:
Education before execution means being prepared to learn as much as possible about the workings of leverage trading.
Tread lightly when you take your first steps on the road to leverage trading. For instance, start with conservative leverage ratios like 5:1 and 10:1, and learn to apply a proper risk management plan.
Practice your trading skills on a demo account before starting live leverage trading.
Frequently Asked Questions
What is a simple definition of leverage?
Leverage allows you to control bigger trade positions than your actual own capital, increasing both potential profits and losses.
What is a safe leverage ratio for beginner traders?
5:1 to 10:1 is considered safe and manageable for new traders.
Can I trade with leverage in South Africa legally?
Leverage trading in South Africa is legal, provided that it is executed via FSCA-regulated brokers. Avoid high leverage (for example, 1,000:1) from unregulated offshore brokers.
How much margin do I need for a R10,000 trade?
Based on a leverage ratio of 10:1, you will need R1,000 margin.
Is leverage available for crypto in South Africa?
Yes, on platforms such as Binance and VALR. Although use caution because these platforms are not FSCA-regulated.
