In order to make money on the Forex market, you need to buy currencies at low and sell high, quite simple. For example: How much money can you theoretically make by trading currencies? Let’s assume that you have 1,000 US dollars on your trading account.

The current exchange rate of Euro versus the US dollar is 1.25. In other words, for 1 euro you get one dollar and 25 cents. You forecast that during the day Euro would rise versus the US dollar. Based on this forecast you buy 800 Euros for 1,000 dollars. Your forecast is correct! Euro rises from 1.25 to 1.26 dollars. Being in profit you decide to close the trade and exchange 800 Euros back to 1,008 dollars. In effect, your profit from this trade is 8 dollars.

Increase Profits

In order to maximize your profit potential, you can use leverage. Leverage is a loan which provides you to trade Forex. The size of the loan can differ but leverage provides you with up to 500 times more funds than your initial capital, which also increases your profit potential 500 times.

Increased leverage means not only more profit potential but also more risks! Managing your risks is very important! Let’s have a look at an example how to use the leverage of one to five hundred (1:500). You have the same 1,000 dollars 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 dollars.

Now, with the exchange rate of 1.25 you exchange all your 500,000 dollars to 400,000 Euros. At the moment when exchange rate raises to 1.26 you exchange the 400,000 Euros back to 504,000 dollars. As a result, you now have 5,000 dollars on your account after returning the loan to your broker. So your net profit is 4000 dollars. An incredible result after just one 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 1,000 dollars. At this point, your trade will be automatically closed and the broker takes back the loan. Consequently, a case when you can lose broker’s loan is almost impossible. Taking everything into account, you now have seen how leverage can increase your profits if you make right decisions. At the same time, leverage can also work against you if you make wrong estimations and don’t limit your losses.

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