3. Why so many People Trade in the
Forex Market? –The Profit Potential
Two factors are forming the great Profit Potential of Forex Trading, liquidity and
trading leverage. Here is a short analysis of these two trading factors.
2.1 Forex Market Huge Liquidity and Low Cost of Transactions
As it was mentioned before the Foreign Exchange Market is really huge with daily
turnovers of more than 5 trillion US dollars. That means that there are tens of
thousands of currency buyers and currency sellers at any given second. That
enormous volume activity pushes the distance between buyers and sellers (called the
spread) in minimal ranges. The average spread on EURUSD for example is less than
2 pips. That means that if the first buyer is at 1.3800 then the first seller is at
1.3802. This distance in the example given is just 0.002, or else 2 pips spread.
Why is this fact so important? This is important because you can open and close a
trading position with an extremely low transaction cost. (i)
2.2 Multiplying Funds via the Use of Leverage
Forex trading provides the unique advantage of huge trading leverage. What does
trading leverage means? Trading leverage means that you can trade more funds that
you really hold. But what makes that advantage astonishing is the number of times
you may leverage your funds.
Most Forex Brokers today offer leverage up to 500:1. Therefore, if you open an
account with $1,000 you may trade theoretically $500,000. (ii)
By combining minimal transaction cost and high trading leverage {(i) and (ii)} it is
obvious what makes Forex Trading so lucrative and popular in a global scale.
Example:
If you open a position worth $500,000 and you gain 1.0% then your earnings are
calculated as:
■ Earnings Computation = $500,000 X 1.0% - Hypothetical Cost of Transaction =
$5,000 - $300 = $4.700
■ Your Initial investment was $1,000, so you gained 370% on your investment with
just 1.0% currency movement
Be aware that this procedure incurs high risks too, as you may win or lose money,
especially if you are not familiar with this process. This example is given to highlight
the profit potential and why Forex Trading attracts so many people worldwide.
Forex Guide v1.0 – Qexpert.com
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