Let’s cut to the chase. Most people don’t get involved in Forex trading just for fun, although there is a lot of excitement. Most people want to make money, and that’s perfectly fine. Many of society’s most respected people, such as Carlos Slim and Warren Buffet, started out as successful investors. Some investors have made billions and billions while many others have made millions trading stocks, bonds and currencies. Forex trading is just one form of investing, but it can be one of the most lucrative if you play your cards right.
Forex trading involves currency trading. A Forex trader trades one currency for another, hoping that the currency he traded will fall while the currency he bought will rise. Eventually, the trader will exchange their currency for dollars or another currency in the hope that they will make a profit.
Usually, currencies move at an incremental rate. Because Forex markets are so massive and liquid, money is constantly changing hands, the market is relatively stable compared to stock markets. Most of the time, a currency will only go up a few pips in any given day and the pip itself is only 1/100th of a percent.
This raises an important question: investors make and lose money due to changes in the market, so how can Forex traders reap all that money? There are two important factors, time and leverage. Although the daily changes in a currency may be small, they can add up over time. In any given year, for example, a currency can go up and down at significant rates, potentially 10% or more.
Another important point is leverage. Since Forex markets generally only move at incremental rates, banks and investment institutions are often willing to give Forex traders a lot of leverage. Let’s say you have $1,000 to invest in Forex. A thousand dollars is not a lot of money to invest, especially if the currency is only going to rise by tiny fractions of a percent in any given day. If your investment of 10,000 USD increases by 2 pips, you will only earn 2 dollars. Of course, if your investment drops 2 pips, you will only lose XXX dollars.
Due to the minute changes and therefore low risk of the currency, many companies are willing to extend huge amounts of leverage, often up to 200:1. Now, if you invest $200,000 in Forex and it goes up 2 pips, you will earn $400. That’s a lot more money isn’t it?
Now add the time factor. Let’s say your investment goes up 15 pips over the course of a month. Now, on your investment of $10,000 plus leverage, for $2,000,000 you will earn $3,000. As you can see, the money is really starting to pile up. Imagine you invest $50,000 and it goes up 15 pips?
The combination of time and leverage can make Forex trading a lucrative proposition for many investors. With careful research and close monitoring of world events, you can make a lot of money on your investments, however, if you don’t take it seriously, you could also lose a lot of money.