If you’ve ever taken an overseas vacation, you probably learned a little bit about exchange rates for U.S. currency that related to the country or region you were visiting. Well, believe it or not, that was your first lesson on forex trading.

Every day you can view a stock app or read daily financial news reports covering the exchange rate between U.S. dollars and foreign currency. And, each day, forex traders pay specific attention to this information as well.

The exchange rate for currency fluctuates rapidly and can change from day to day depending on what’s happening within world markets. In fact, many investors have cashed in by taking advantage of current forex promotions.

If you’re looking to figure out how to cash in on the forex market, here, we’ll unpack the details and get you started on understanding the terminology associated with this option.

What is Forex Trading?

It’s been estimated that the New York Stock Exchange, each day, trades an astounding 1.5 trillion dollars. But this pales in comparison to the forex trade market, which is actually the largest financial market on the planet. This being said, there’s a lot of money and offers within this market.

The forex trade market is estimated to trade a daily amount of between 6 and 7 trillion dollars, over six times the amount of the New York Stock Exchange. This is because trade values are always changing, and the forex market runs 24 hours a day, making the forex very liquid.

At its basic element, the forex market works almost exactly the same as buying or selling stocks. The only different element with forex trading is that this is done using pairs of currencies. When you make a forex trade, you’re buying one form of currency while simultaneously selling another.

Forex Trading Basics

The overall point of forex trading is to make profit off of the fluctuation in market price of currencies. When you buy a foreign currency at an exchange rate, you can then sell it later for a profit when the exchange rate goes up.

For example, let’s say that you’re using U.S. dollars to buy Japanese Yen at a rate of 1.50 to 1.

If you buy 1,000 Japanese Yen, you’ll pay $1,500 U.S. dollars at the current exchange rate. Later on, even on the same day, let’s say that rate goes up to 1.70 to 1. A savvy trader can then sell that currency for $1,700 U.S. dollars and make a profit of $200.

This only illustrates forex in its most basic form. Keep in mind, however, that there are other components at play that allow a trader to make large financial moves within the system, but these aren’t for the risk averse.

Leverage

Like derivatives, as associated with stocks, leverage is largely synonymous with forex trading.

Leverage basically allows a trader to buy a multiple of an original purchase with the assistance of a brokerage firm. For example, some brokerage firms set a specific leverage rate with some as low as 10:1, while others might run as high as 500:1.

What leverage does is allow a trader to buy thousands of dollars in a foreign currency while only having to pay a fraction of the cost. To illustrate this, let’s say you want to buy $30,000 worth of Euros. At a rate of 30:1, you’ll only have to pay $1,000 U.S. dollars to acquire $30,000 in Euros while the brokerage firm supplies the rest of the funds to cover the cost.

If you make a profit, leverage in the forex market amplifies gains. It also amplifies losses. So, if you took a 10 percent loss, you’d not only lose your initial investment, but you’d have to pay off the brokerage firm as well. But when done right, and circumstances are in your favor, it’s ultimately one of the best ways to make your money work for you.

While forex trading is a quick way to make large financial gains, this is also a game played in an extremely high-risk market. With daily fluctuation rates and the market being influenced with anything from wars to products, do proper research when investing money in any financial market.