Leverage allows you to get exposure to large amounts of currency without having to commit too much capital.
A single pip is a very small unit of movement, and while forex pairs tend to be very volatile they often move in relatively minor increments. For this reason, forex traders will either have to trade large batches known as lots, or take advantage of leverage.
A standard lot is 100,000 units of currency. Alternatively, you can sometimes trade mini lots and micro lots, worth 10,000 and 1,000 units respectively.
Individual traders don’t necessarily have 100,000 pounds, dollars or euros to place on every trade, so many forex trading providers offer leveraged trading. Leverage allows you to open a position without have to pay its full value upfront. A trade on EUR/GBP, for instance, might only require 2% of the total value of the position to be paid in order for it to be opened.
When you close a leveraged position, the profit or loss is based on the full size of the trade. While that does offer a chance of higher profits, it also brings the risk of amplified losses: including losses that can exceed your deposits.