For instance, EUR/USD the exchange rate is 1.2505/1.2509 & your leverage is 1:100. You believe EUR/USD will shoot up & buy 0.1 lot of EUR/USD at 1.2509 (Ask price). So, you buy 10,000 EUR and sell 10,000*1.2509=12,509 USD. In fact to fund this position you do not have to have 12,509 USD but only 125.09 USD. The rest of the money is leveraged to you by the service provider.
Leverage (or gearing) mechanism allows you to open and hold a position much larger than your trading account value. 1:100 leverage means that when you wish to open a new position, then you need to support a deposit 100 times less than the value of the contract you are interested in.
For example, you believe that EUR/USD is moving higher and buy 10,000 EUR and sell 12,509 USD. Assuming you are right and EUR/USD goes up to 1.2599/1.2603 and you decide to close the position: when you close a long position you sell the base currency (10,000 EUR in our example) and buy the quote currency (10,000*1.2599 = 12,599 USD):
To fund this position you only need 100 EUR (approximately 125 USD) not 10,000 EUR. The profit on this position is 90 pips (1.2599-1.2509=0.0090). A pip or point is a minimal rate fluctuation. For EUR/USD 1 pip is 0.0001 of the price (see Table 2).
This example shows a favourable outcome. If EUR/USD had fallen you would realise a loss not a profit and with leverage this loss will be magnified. For example, if you close the position at 1.2419, your loss would be $90.

Forex is never is Risk Free game and there is always a possibility that the trades can go against you. To avoid this, the FOREX trader can learn how to trade profitably and while minimizing losses. Always check whether your FOREX brokers are associated with large financial institutions like banks or insurance companies and with proper government agencies or not. In the United States brokers should be registered with the Commodities Futures Trading Commission (CFTC) or a member of the National Futures Association (NFA). You can also check with your local Consumer Protection Bureau and the Better Business Bureau. There are still risks to FOREX trading as the transactions are subject to unexpected rate changes, volatile markets and political events.
Exchange Rate Risk means refers to the fluctuations in currency prices over a trading period. Prices can fall rapidly resulting in substantial losses unless stop loss orders are used when trading FOREX. Stop loss orders specify that the open position should be closed if currency prices pass a predetermined level. Stop loss orders can be used in conjunction with limit orders to automate FOREX trading limit orders specify an open position should be closed at a specified profit target.
Interest Rate Risk can result from discrepancies between the interest rates in the two countries represented by the currency pair in a FOREX quote. This discrepancy can result in variations from the expected profit or loss of a particular FOREX transaction.
Credit Risk is the possibility that one party in a FOREX transaction may not honor their debt when the deal is closed. This may happen when a bank or financial institution declares insolvency. Credit risk is minimized by dealing on regulated exchanges which require members to be monitored for credit worthiness.
Country Risk is associated with governments that may become involved in foreign exchange markets by limiting the flow of currency. There is more country risk associated with 'exotic' currencies than with major currencies that allow the free trading of their currency.
Limiting Risk FOREX trading can be risky, but there are ways to limit risk and financial exposure. Every FOREX trader should have a trading strategy knowing WHEN TO ENTER AND WHEN TO EXIT the market and what kind of movements to expect. This requires education which is the key to limiting FOREX risk.
At all times follow the basic rule:
• Do not place money in the FOREX that you cannot afford to lose.
• It is necessary to know at least the basics about technical analysis and how to read financial charts.
• It is necessary to study chart movements and indicators and understand how charts are interpreted.
Even the most knowledgeable traders, however, can't predict with absolute certainty how the market will behave. Stop-loss orders are the most common ways of minimizing risk when placing an entry order. A stop-loss order contains instructions to exit your position if the currency price reaches a certain point. If you take a long position (expecting the price to rise) you would place a stop loss order below current market price. If you take a short position (expecting the price to fall) you would place a stop loss order above current market price.

Under margin trading conditions even small market movements may have a great impact on the customer's trading account. You must consider that if the market moves against you, you may sustain a total loss greater than the funds deposited. You are responsible for all the risks, financial resources you use and for the chosen trading strategy.
It is important that you should not engage in trading unless you understand the nature of the transaction you are entering into and, the true extent of the exposure to the risk of loss. These products may not be suitable for all investors; therefore if you do not fully understand the risks involved, you must seek independent advice.
Under margin trading conditions even small market movements may have great impact on the customer's trading account. You must consider that if the market moves against you, you may sustain a total loss greater than the funds deposited. You are responsible for all the risks, financial resources you use and for the chosen trading strategy.
Some instruments trade within wide intraday ranges with volatile price movements. Therefore, you must carefully consider that there is a high risk of losses as well as profits.

The best way is the simulated Forex trading which lets you see the account online and see how it would perform if it were a read account. You will be able to see if your trading resulted in a profit or a loss at the end of the day without risking any real money. Simulated Forex trading works by giving you an imaginary amount of money in your simulated margin account. You will watch the news reports and study the currency markets. When you decide which currency will increase in value against another currency, you buy an amount of that currency and sell off the equal amount of the decreasing currency. The difference between the two currencies is what gives you your profit. Using simulated Forex trading is the best way to learn the Forex trading game without risking your own money.
After using a simulated account you may find that Forex trading is something that you just don't want to do or you don't have a knack for it. Simulated Forex trading will also let you practice your trading. You can learn from your mistakes without risking any real money. Most of the brokerage houses will offer simulated Forex trading. Some may charge for the service, but the fee is usually small. So before you jump in feet first to Forex trading, use a simulated Forex trading tool to learn the ropes. Forex trading can be quite volatile and complicated. Be smart, practice first and don't risk losing your hard earned cash.