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.

Introduction to forex

Alright, so I wrote a pretty long introduction which was about the blog itself, but what is the BLOG about? Forex, and investments.

Today, I'll talk about forex.

Well, what's forex? The word itself stands for foreign exchange. It's basically a market for currencies.

You buy and sell money, which kinda sounds stupid, but it's not.

As every commodity, money itself has value as well, which differs from other commodities (currencies). As we know, the values of currencies always change, we hear it all the time in the news, etcetera. Did you know you can actually get rich off this?


Let's pretend that the currently you can get 2 Canadian dollars for 1 US dollar.

So, you buy 2 canadian dollars for 1 US dollar, you have 2 CAD on you. The exchange rate suddenly drops to 1 canadian dollars for 1 US dollars, for whatever reason. ( I'll probably write a post about why the value of a currency can rise/drop ).

Wait a second.. You have 2 canadian dollars from your previous exchange, so you just exchange it back for 2 US dollars. You just got a profit of 1 US dollar. Awesome, huh?

That's basically what forex is about. The trading of currencies. Of course, it's not THAT simple, that's why I've made a blog to explain everything to the tiniest detail, so that we, forexnoobs, can later be called forexpros. Well, I hope this'll happen someday!