In order to make money in the Forex market you have to buy low and sell high. It’s still not quite simple. Let’s have a look at the example. How much money can you be theoretically make by trading currencies?
Let’s assume that you have 1000 US dollars on your trading account. The current exchange rate of the Euro versus the US dollar is 1.25. So for €1, you get $1.25. You forecast that during the day, Euro would rise versus the US dollar. Based on this forecast you buy €800 for your $1000. Your forecast is correct. Euro rises from 1.25$ to 1.26$. Being in the profit, you decide to close the trade, and exchange €800 back to $1008. In affect, your process in this trade is $8. Not that much right? You raise the question, would it be possible to increase profits? In order to maximize your profit potential, you can use leverage. Leverage is alone, take mill provides you to trade Forex. The size of the loan can different, but take milk provides you with up to 500 times more funds than your initial capital, which also increased by 100 times. Great right? Still, please remember, increased leverage means not only more profit potential but, also more risks. Managing your risk is very important. Let’s have a look at an example of how to use leverage of 1 to 500. You have the same $1000 on your account, and you estimate that Euro will rise versus the US dollar. Therefore, you decide to take the biggest possible loan from your broker 499.000$. Now, with the exchange rate of 1.25, you exchange all of your $500000 to €400000. At the moment when the exchange rate rises to 1.26, you exchange the €400.000 back to $504.000. As a result, you now have $5000 on your account, after returning the loan to your broker, so your net profit is $4000. An incredible results after just 1 day of trading. In this example, we have looked at the scenario when your forecast turns out to be correct. But what would have happened if instead of rising, Euro had fallen against the US dollar? In this case your trade would be open, until your losses equal your initial deposit, which is $1000. At this point, your trade would be automatically closed, and the broker takes back the loan.
Taking everything into account, you have now seen how leverage can increase your profits if you make the right decision. At the same time, leverage can also work against you if you make the wrong estimations, and don’t limit your losses.
So, are you ready for the risk?