Using Leverage to Make Money Off of Forex

by Redeeming Riches on June 24, 2014

Have you ever heard of the Forex market? Forex refers to the trading of currencies. Most people don’t realize it, but the Forex market is actually the world’s largest financial market, worth far more than any stock or futures exchange. It is also the world’s most liquid exchange and trading is literally conducted 24/7.

Most traders are large institutions trading huge amounts, often billions of dollars’ worth of currencies. There are also smaller Forex traders who try to generate profits off of changing exchange rates. By figuring out which currencies will rise and which currencies will fall, Forex traders can make a lot of money.

For example, if the Canadian dollar and U.S. dollar are currently trading at 1 to 1, but a Forex trader believes that the Canadian dollar will rise in the months to come, he can sell U.S. dollars to buy Canadian dollars. If the Canadian dollar rises and suddenly it takes $1.25 USD to buy $1 CAD, the Forex trader will make a profit because he or she will now be able to buy more U.S. dollars.

Currencies are always traded in currency pairs; in this case, the pair would be CAD/USD. The CAD (Canadian dollar) is the base currency, while the USD is the quote currency. The currency pair will be followed by a number. This number shows you how much of the quote currency you need to buy one unit (i.e. a dollar) of the base currency.

There’s one problem with Forex trading, however. Most of the time, markets move very slowly, often by well less than a tenth of a percent within a trading day. So how do traders make money? They use leverage, which is basically borrowed money you can use to buy an asset.

Leverage is available in most areas of financial trading. With Forex, however, markets are so stable that the amount of available leverage is huge. In fact, leverage can reach 200:1, meaning that if you have a thousand dollars, you can gain $200,000 dollars’ worth of leverage!

With that kind of purchasing power, if prices rise by even a tiny fraction of a percent, you can generate huge returns!

Google+ Comments

Related Posts