@SimplyOra
You are correct. The definition given, which involves borrowed money, is completely false.
Congratulations, for seeing this!
In the retail forex business, there are two types of leverage: (1) the maximum allowable leverage dictated by your broker, and (2) the actual amount of leverage that you use in any particular trade.
Both types of leverage involve the ratio between your position size and your account balance.
But, neither type involves borrowing money from your broker, or from anyone else.
(1) Maximum allowable leverage
If your broker specifies maximum allowable leverage of 100:1 (for example), he is saying that you may take a position size that is up to 100 times the size of your account balance.
If, for example, you have an account balance of $1,000 and your broker allows you to use up to 100:1 leverage, then you may take a position that is worth up to $100,000.
At no time has your broker offered to lend you money. He will never do that.
He is simply saying that, provided you have the minimum $1,000 or more in your account, he will allow you to make this trade.
Using this much leverage would be foolish, as you can probably work out for yourself by simply considering the implications of a normal price move against your huge $100,000 position.
(2) Actual amount of leverage you use in a particular trade
Let’s assume that you are not foolish, and would never use the 100:1 maximum allowable leverage offered to you by your broker.
Instead, you are sensible, and you use prudent risk management to determine the size of your position. You decide to risk no more than 1% of your account balance on a trade that you intend to take. Factoring in the stop-loss level which your charts suggest to you, you determine that a position size of 2 micro-lots (that is, 2,000 units of currency) is the appropriate position size. And you determine that the notional value of this position is $2,000.
You are now entering a $2,000 position with an account balance of $1,000. The actual leverage you are using is 2:1, because your position size is 2 times the size of your account. This position size is well below the maximum size allowed by your broker.
And, just as in (1) above, there is no borrowing involved.
So, what really is happening? How can you trade a larger position than your account balance?
Your position is very much like a bet. You are betting that a $2,000 position in a particular currency pair will move in a certain direction. In order for you to place this bet, your broker requires that you post MARGIN. Given your broker’s 100:1 allowable leverage, the initial margin required for any position you enter will be 1% of the notional value of your position. In the case of your $2,000 position (in the example above), this initial margin amount is $20.
As soon as your position is entered, this initial margin amount might change to an even lower maintenance margin amount, but let’s not consider that at this time. Let’s just say that, for the duration of this trade, the margin required is $20.
That $20 amount is escrowed, so to speak. It is set aside, out of your reach, although it is your money. It’s like a security deposit, to allow you to take this $2,000 position.
The rest of your account balance remains available for your use, including for use to cover losses (should they occur) in your position.
Your bet can have only 3 possible outcomes: it will produce a profit, it will break even, or it will produce a loss. If your bet produces a profit, that profit will be added to your account, in the currency in which your account is denominated, as soon as you close your position. If your bet breaks even, your account will be in the same condition it was in before you took this trade. And if your bet produces a loss, then that loss will be deducted from your account, in the currency in which your account is denominated.
So, no matter what currency pair you bet on, profits and losses (P/L) will appear in your account in the same currency that you originally deposited when you opened your account.
A simple bet. You win, or you break even, or you lose.
But, you don’t borrow.