If a forex broker offers you leverage forex trade, it means that you can trade on credit, i.e you can borrow money from the forex broker to carry out transactions.
Unlike an unsecured loan from a bank where the amount you can borrow will depend on your salary and other personal circumstances, there are many forex brokers that will offer you credit based on how much of your own money you put into the transaction.
Example: You deposit €200 into your trading account and is offered to borrow €10,000 from your broker to carry out one or several transactions. For each €1 that you put in of your own money, you can borrow €50 from the broker.
Forex trade always involve risks, so it is important to carefully weigh the pros and cons before you carry out any trade on credit, regardless of whether the borrowed money comes from your broker, from your credit card or from any other source of credit. Trading on credit means that you can end up losing money that don’t have.
Forex brokers are often very happy to offer leveraged trading. This is because the larger a transaction is, the more money the broker makes. By offering credit, they facilitate larger transactions.
It is very important to check the T&Cs before you accept any offer of credit from your FX broker. To mitigate their risk, FX brokers will typically include a clause that allows them to automatically close your position when the value of that position (or the total value of all your positions) decreases below a certain point. This might seem like a great idea at first glance since it means that there is a limit to how low the value of a position can drop before the position is sold off and the proceeds are used to at least partly pay back your loan, but it also means that even a short-term dip in value will cause an automatic close. There are many things that can cause a temporary dip in value and if the value goes up again very soon afterwards you will probably feel sour about your position being closed and you having to pay back the rest of the loan out of pocket.