Let’s get straight to the point. Most people don’t get involved in Forex trading purely for the thrill of it, though there is plenty of excitement. Most people want to make money, and that’s perfectly fine. Many of the most respected people in society, such as Carlos Slim and Warren Buffet, started out as successful investors. Some investors have made billions upon billions while many more have made their millions through trading stocks, bonds, and currencies. Forex trading is only one form of investing but it can be one of the most lucrative if you play your cards right.
Forex trading involves the trading of currencies. A Forex trader exchanges one currency for another, hoping that the currency she traded away will drop while the currency she bought will rise. Eventually the trader will exchange her currency back into dollars or another currency in hope that she produced a profit.
Usually currencies move an incremental paces. Because Forex markets are so massive and liquid, which cash constantly exchanging hands, the market is relatively stable when compared to stock markets. Most of the time a currency will rise by only a few pips within a given day and pip itself is only 1/100th of a percent.
This raises an important question: investors make and lose money off of changes in the market so how then do Forex traders rake in all that money? There are two important factors, time and leverage. While the daily changes in a currency may be small they can add up over time. Within a given year, for example, a currency can rise and fall by significant rates, potentially 10 percent or more.
Another important point is leverage. Since Forex markets usually only move at incremental rates, banks and investing institutions are often willing to extend Forex traders a lot of leverage. Let’s say you have USD 1,000 dollars to invest in Forex. A thousand dollars isn’t a lot of money to invest, especially if the currency is only going to rise by tiny fractions of a percent in a given day. If your USD 10,000 investment moves up 2 pips you’ll only earn 2 dollars. Of course if your investment drops by 2 pips you’ll only lose XXX dollars.
Due to the tiny changes and thus low risk in the currency many companies are willing to extend huge amounts of leverage, often up to 200:1. Now, if you invest USD 200,000 in Forex and it moves up 2 pips, you’ll earn 400 dollars. That’s a lot more money isn’t it?
Now add in the time factor. Let’s say your investment moves up 15 pips over the course of a month. Now off your USD 10,000 investment plus leverage, for USD 2,000,000, you’ll earn 3,000 dollars. As you can see the money is really starting to add up. Just imagine if you invested USD 50,000 dollars and it moves up by 15 pips?
The combination of time and leverage can make Forex trading a lucrative proposition for many investors. With careful research and closely monitoring world events you can make a lot of cash off your investments, however, if you don’t take it seriously you could also lose a lot of money.