To make money in the foreign exchange market, you have to buy low and then sell high It’s simple, let’s look at this example: How much money do you need in theory to buy and sell currencies? Let us assume that you have 1000 USD in your trading account. The current exchange rate of the euro to the dollar is 1.25. In other words, for 1 euro You can exchange it for 1.25 dollars. You predict that the euro will appreciate against the dollar. On the basis of this prediction, you bought 800 Euros for 1,000 USD. It turns out that your prediction is correct! The euro exchange rate rose from 1.25 to 1.26. You decide to close the trade, get a profit, and settle for security. Your 800 euros were exchanged for 1008 dollars. Your profit on this transaction is $8. Not too much, right?
You ask a question: Is it possible to increase profits? To maximize profit potential, you can use leverage. Leverage is a type of loan. The size of the loan for foreign exchange transactions can be different. Increasing leverage means not only more profit potential It also magnifies the risk! Managing your risk is very important! Let’s see an example of how to use leverage 1 magnification 500 times (1:500). Now you have the same 1000 USD in your account You expect the euro to appreciate against the dollar Therefore, you decide to get the maximum possible loan of $499,000 from your broker. Now, the exchange rate of the euro to the dollar is 1.25 You bought 400,000 euros with all your 500,000 dollars. Your judgment is correct and the exchange rate of the euro against the dollar then rises to 1.26 You spend 400,000 euros back to 504,000 dollars In this way, you now have $5,000 in your account The loan is returned to your broker. So your net profit is $4,000. Just one day of trading, an incredible result! In this example, your prediction turns out to be correct. But if the price is not rising If the exchange rate of the euro against the dollar falls Your transaction will remain open until your loss is equal to your initial margin That is 1,000 dollars. At this point, your position is automatically closed and the broker takes back the loan. Therefore, it is almost impossible for you to lose money on broker loans. Taking all factors into consideration, you have now seen how to use leverage. If you make the right decision, leverage can increase your profits If you make a wrong judgment, leverage will not limit your losses.