Alright. Here’s where the money comes in.
Picture this: You believe there are signs the British pound will go up against the U.S. dollar. To get in on it, you want to open a standard lot, totaling 100,000 units GBP/USD. However, you don’t have enough to open that. The answer to the problem is leveraging.
Leveraging is essentially putting down a small deposit, also called a margin, on a lot. To leverage, you would look at a ratio of the transaction size (or “position size”) in relation to the actual cash (or “trading capital”) to find the margin.
So, in our GBP/USD example, say there’s a 50:1 leverage. In relation to 100% of the total amount of the lot, the leverage would give us a 2% margin. To leverage $10,000 worth of GBP to trade with USD, you would have to put down $2,000.
Once you have your lot of GBP, you wait for the exchange rate to climb. With that initial down payment, you control $10,000 worth of GBP. Overnight, the GBP/USD goes up by half a pence. While you sleep, you make $500.
And that’s the secret to making money on the forex market.
By leveraging the right lot size after determining what the pips are for a certain trade, of course, while you keep an eye on the countries in question, you can act quickly and make a good deal of money.