The currency market is one of the most liquid markets in the world and before engaging into it, its principal must be understood. The concept of forex trading is buying a currency with another currency at its present exchange rate. This means going long of the first currency and short of the second currency and that one’s position will increase in value if the strength of the first currency against the second currency is increased and the first currency can now be sold at a greater amount. Here are some examples that can help one to further understand what the forex market is all about.

FIRST EXAMPLE

Most forest traders often as questions like "How much money can I make in the forex market?" this particular question depends on how much you can risk because the higher the currency employed in the business, the higher the profit and also the higher the risk. Let’s say a trading was started with 6,000 dollar account and he is willing to take a risk of 1000 dollar. A profit goal of 1000 dollar and a stop loss of 1000 dollar can be made on a long opening while the chances of profit are 70 percent.

But along the way, the trade becomes a loser and the trader losses all the 1000 dollar and since it is the amount placed on risk, the traders could close his account and take back the remaining 5,000 dollar.

If the traders wanted to risk 200 dollar per trade and made the profit goal to 200 dollar as well, he makes 20 trades, because if all 20 trades are losers he will lose the \$1,000 willing to be risked. The probability of 10 losing trades at once is less than 1%. Meaning it's likely that the trader will have a couple of wins within the 10 trades.

Compare the two scenarios:

In the first stage of the example, the trader’s risk of losing his money is 40%. But if he won, the trader would have made \$1,000 profit.

At the second stage of the example, the risk of losing the money after 20 trades is less than 1%, but had a chance of making \$400.

SECOND EXAMPLE

Most forex traders don’t understand the meaning of leverage. Leverage actually means borrowed money or funds. It is always expressed in ratio. It always traders to trade without using up their actual amounts.50: 1 Leverage actually means that with a minimum account of USD 10,000, for instance, one can trade up to USD 500,000. The USD 10,000 is usually seen as a guarantee for the future performance of one’s position.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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