A Margin Based System
Currency trading used to be an investment for wealthy investors. Ordinary investors could only envy the returns made from the currency hedge fund managers. However, due to the advent of the internet and prevalence of online trading, currency trading has become more and more popular. Today, foreign exchange trading is no longer only available to the wealthiest through the big investment banks. Futures commercial merchants approved by CFTC are also able to offer foreign exchange as a product to everyday investors at an affordable level. Thanks to the invention of leverage and margin trading system, investors can trade much bigger contract size with a fraction amount of deposits required. Increase Your Buying PowerLeverage is the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. Many traders consider leverage dangerous because traders add bigger position sizes without actually owning them. Nevertheless, leverage is an exceptionally good tool that can be utilized to increase your buying power as long as trader has a risk management plan associated with it. Some seasoned currency trader harness leverage effectively in currency trading. They apply small leverage to test the market sentiment. Once the strategy works with small position size and leverage, they then multiply leverage quickly to maximize profit potentials.How it WorksFor Example: in order to trade 100,000 units of USD/JPY. Traditionally, trader needs 100,000 US dollars or we say 1:1 leverage (trading cash). However, with 100:1 leverage, currency trader is only required to deposit 1/100th of the amount needed, 1,000 US dollars.
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