Exchange of currencies on international markets in order to make money is called Forex trading. This activity is carried out by a specialized broker (forex broker) who offers the possibility of immediate currency trading on a trading platform connected to the interbank market in real time.
A forex broker is a specialized company that has all the necessary resources to connect its clients with the forex market. These brokers offer excellent conditions for currency speculation, which cannot be found in currency exchange offices or banks.
To better understand how Forex trading works and how you can earn money in this way, let’s give you a basic example of trading. Let’s consider that John buys 100,000 euros for American dollars. The exchange rate is $1,000 per euro, which means that John pays $110,000 to buy $100,000. The euro exchange rate increases from 1% to $1,1100 per euro. John decides to sell his euro to make money from it. He gets $111,000 when he sells his Euro. Thus, with a growth of only 1%, John earned a thousand dollars in the forex market.
In one day there can be 1% growth, i.e. Forex trading can bring a very high income in a very short time. Now you will think that “I don’t have a hundred thousand dollars” and that only rich people can earn so much money in this way. Naturally, this is the way to think, because we all know that most investments and opportunities are only available to the rich, but in the case of Forex, this is not the case.
This is where the levers of influence appear.
How does leverage work on the Forex market?
In order for every investor to be able to trade large amounts of money, forex brokers offer leverage. This instrument consists of a virtual credit that the broker offers to his client to use larger amounts of money.
The broker knows very well that the Forex market has small daily movements. For this reason, the trader has to trade a lot of money to generate significant profits. If Mr. John had bought only a thousand euros from our previous example, his profit would have been only $10. The broker is aware of this and also knows that if the market moved against John, his loss would be the same. To increase the profit (and loss) potential of his clients, the broker offers leverage.
If John has a thousand dollars in his account, he needs leverage of 1:100 to be able to use one hundred thousand dollars. But in our example Juan had to spend $110,000 to buy euro, which means that the leverage needed in this case is 1:110. Fortunately, the best forex brokers offer more leverage. A good forex broker will offer you at least 1:200 leverage because there are brokers who offer leverage up to 1:1000.