FRACTIONS OF A PENNY: TRADING ON MARGIN
If prices are quoted to the hundredths of cents, how can you see any significant return on your investment when you trade forex? The answer is leverage.
When you trade forex, you're effectively borrowing the first currency in the pair to buy or sell the second currency. With a US$5-trillion-a-day market,
the liquidity is so deep that liquidity providers—the big banks, basically—allow you to trade with leverage. To trade with leverage, you simply set aside the required margin for your trade size.It gives you much more exposure, while keeping your capital investment down.
But leverage doesn't just increase your profit potential. It can also increase your losses, which can exceed deposited funds. When you're new to forex, you should always start trading small with lower leverage ratios,
until you feel comfortable in the market.