Let's say you think the euro will increase in value against the US dollar. Your pair is EUR/USD. Since the euro is first, and you think it will go up, you buy EUR/USD. If you think the euro will drop in value against the US dollar, you sell EUR/USD. If the EUR/USD buy price is 0.70644 and the sell price is 0.70640, then the spread is 0.4 pips. If the trade moves in your favor (or against you), then, once you cover the spread, you could make a profit (or loss) on your trade.
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. If you're trading 200:1 leverage, for example, you can trade $2,000 in the market while only setting aside $10 in margin in your trading account. For 50:1 leverage, the same trade size would still only require about $40 in margin. This 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.
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. If you're trading 200:1 leverage, for example, you can trade $2,000 in the market while only setting aside $10 in margin in your trading account. For 50:1 leverage, the same trade size would still only require about $40 in margin. This 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.
In trading, there are always a multitude of possibilities.
When you consider the scenarios where you're wrong - then you'll no longer overleverage because the possibility of a certainty is dissolved and all you're left with is a probability.
Despite how "high probability" something may be, by default, there is a "low probability" that it does not happen - thus the desire to overleverage should dissipate in most rational individuals.
- Bryan, 2021.
When you consider the scenarios where you're wrong - then you'll no longer overleverage because the possibility of a certainty is dissolved and all you're left with is a probability.
Despite how "high probability" something may be, by default, there is a "low probability" that it does not happen - thus the desire to overleverage should dissipate in most rational individuals.
- Bryan, 2021.
In business:
You need capital.
You got expenses to cover.
You don't expect to succeed from day one.
You need some time before you make a profit.
Trading is a business—so treat it as one.
"Rayner Teo"
You need capital.
You got expenses to cover.
You don't expect to succeed from day one.
You need some time before you make a profit.
Trading is a business—so treat it as one.
"Rayner Teo"
