The Forex Market Uses Margins To Increase Your Profits

The Forex market uses margins to increase your profits

Forex is a nickname for the foreign exchange, a vast market of trading in which the
commodity is money itself. In the Forex market, traders are buying and selling foreign
currencies -- trading dollars for euros, pounds for yen, and so forth.

Forex is profitable because national currencies fluctuate from day to day based on
predictions of the nation's gross domestic product and other factors. As with the stock
market, the idea with the Forex is to buy low and sell high: Buy a lot of a particular
currency when it's weak, then sell it when it becomes stronger.

For example, bad financial news in Great Britain means that Forex traders will be selling
off their British pounds as fast as possible, as the pound is about to become devalued.
Once the pound recovers, those traders will sell it for something else, thus turning a
profit.

Though we talk of "buying" and "selling" pounds, euros, yen and francs, the transactions
performed in the Forex are not literal. That is, if you want to buy 100,000 euros, you don't
have to withdraw the equivalent U.S. dollars from your bank account and swap them out
for a big stack of euros. Everything is done on paper only, though the resulting profits
and losses are real.

Because the transactions are not done physically, there is room in the Forex for what are
called "margins" or "leverage." Put simply, this means you don't have to actually put up
the full amount of the position you're taking. Usually the margin is 1%, meaning that
when you put $1,000 into it, you're actually getting $100,000. Of course, margins
multiply your losses as well as your profits, so you have to be careful.

One of the reasons for allowing a 100:1 margin like this is that the major world
currencies in the Forex market usually fluctuate less than 1% a day. (In the stock market,
a typical stock might fluctuate as much as 10% in one day.) With changes that small,
your daily loss or gain on an initial investment of $1,000 would be almost imperceptible,
usually less than $10 either way. By multiplying it by 100, the gains and losses in the
Forex market are more pronounced.

With leverage implemented that way, the basic "lot" for buying and selling currencies is
usually 100,000 (which of course only costs 1,000). Most firms that handle day-trading
on the Forex market don't go any lower than that.