Hi @Chinmay_Kalmane,
Even at the institutional level, major financial firms trade forex with each other based on credit lines and/or margin. This means that just as you the retail trader do not have to put up the full face value of a trade in order to take a position in a market, your retail forex broker does not have to put up the full face value of their net exposure in the market in order to offset it with their institutional liquidity providers.
(Click here to read more about how retail forex brokers manage the risk of offsetting your trades: Who is the counterparty in an exchange?)
Why is so much leverage available in the forex market to magnify gains and losses at both the retail and institutional level? Consider the following page which shows the average daily volatility on currency pairs: Forex Volatility - Mataf
At the time of this post, it shows the average daily volatility for EUR/USD over the past 10 weeks to be 0.73%. That means, if your retail forex broker requires you to put up 1% of the face value of your position as margin that’s still more than the daily average volatility in that currency pair.
For this reason, traders are required to put up more margin for more volatile currency pairs. Furthermore, your broker should monitor your margin position in real time and automatically close your trades, if your account falls below the minimum margin requirement.
(Click here to read more about the perils of trading with brokers that do not enforce margin requirements responsibly: LOW leverage is in fact dangerous)