Forex introduction: Leverage

You must be saying "WAIT A SECOND! The exchange rates don't jump around that much!" when you read my last post. That is true. So, how do you make money out of this, when they only move around a tiny bit?

Leverage. This is the two bladed sword that make big profits and even bigger losses reality.

The idea is that the more units you have of that currency, the more the changes in the exchange rates infuence your profits and your losses.

Whenever you trade in forex, you usually buy 10,000 units of that particular currency. 1 lot equals 10,000 units, so when you buy for example 5 lots, you are talking about 50,000 units.

So, buying/selling 1 lot means you basically trade with 10,000$. That's a lot, how can you afford that? Here comes the leverage:

Your broker basically lends you this money. You pay 100$ to your broker, with a leverage of 1:100. That means, you have 10,000$ available to trade with, even though you only 'risk' 100$.

The reason the broker can do this is because currencies are pretty stable, and the money you buy and sell never gets 'worthless'. It's still money.

Basically, whenever you sign up for an account at a broker, always check what leverage options they have and how you can use this to your advantage.