Leverage is a mechanism involved in your margin balance. Your margin is calculated for the amount of money actually available in your account for trading. Leverage will hold a piece of that balance for a trade you place. The amount that is held is a percentage of the overall trade amount. Since most traders do not have 10,000 AUD to put into a trade it works out to the advantage of the trader. Leverage can be dangerous in currency trading because it uses more money than one might have readily available. You still have to account for the loss of the money. Of course the reason it is used is the potential increase to earnings. Since leverage is such a risky entity it is best to have examples of how to use it.
Assessing Currency Trading Leverage
If you open a position of $100,000 or a standard lot size you would need $1,000 AUD in your account. You would need a specific percentage of money to be available to cover your current position. There are different leverage amounts from brokers, but many start with 100:1. You might have as little as 20:1 leverage in currency trading or as much as 400:1. The higher the leverage, the higher the risk is. This is why the following example can be helpful to your understanding.
A trader has 5050 AUD in his account. The leverage required is 100:1. The trader decided to purchase 5 contracts at 100,000 each. This means 500,000 was purchased and the pay was 5000 AUD. The AUD/USD rate for the example is .8000 at the beginning of the purchase. The rate moved to .8100 meaning a 100 pip movement. To find the profit you take 100 pips multiplied by the pip cost of $10 and multiply by the number of contracts which was 5. This provides $5000 USD profit, which is then converted to AUD by taking 5000/.8100 which is 6173 AUD. If instead during currency trading the rates dropped from .8000 to .7900 it would be a loss of 6173 AUD.
Currency Trading and Leverage Mistakes
The above example has shown you how well you can make money or lose it depending on how the rates move. The theory in the above example is that AUD was purchased. If the USD had been purchased with a loss of 100 pips then it would have actually been a profit because 100 pips in the USD favour on a purchase of USD means more money in comparison to the AUD. It might sound strange and twist your brain, but consider how currency trading works for a moment. If you sold AUD to buy USD you naturally want the rate to fall because it would take less USD to buy AUD back. Of course, since the USD would be in profit you have to keep your profit in USD or it turns into a loss on the conversion back.
Just remember that the base currency you buy needs to be at a decent rate where you buy in low and sell high for profit. With the quote currency in currency trading you buy in high and sell low.