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Forex Trading Example
The following Forex trading examples demonstrate the background of Forex trading. These examples show that trading on the Forex market may be potentially exciting, but at the same time there is also a significant amount of risk involved.
EUR/USD Example
You transfer a sum of $100,000 into your Forex account. The default setting of all trading accounts is 0.5% margin and leverage of 200:1. If you open a $10,000 position, then you are required to uphold a margin of $50 using 200:1 leverage. The calculation is simple, position size/leverage equals margin required. $10,000/200 = $50.
Trading Day One
As the investor, you foresee the EUR to gain in value against the USD. As a result, you buy $100,000 of the currency EUR/USD pair. The market price is quoted as 1.0250 / 1.0253. Therefore, you purchase EUR at 1.0253.
In the process of the above, you are buying EUR 100,000 (20 lots at $5,000 each) and selling USD 102,500 ($100,000 × 1.0250), as a margin of $500 ($100,000 × 0.5%) was used, while borrowing $99,500 ($100,000 - $500) from Forex.
Trading Day Two
The trade you bought has been a successful so far, as the EUR has risen against the USD. Now the quote for the EUR/USD is 1.0400 / 1.0403.
You now decide to take your profit by initiating a sell market order on the Forex trading platform. The sell market order is instantly executed, and 20 lots of EUR/USD is sold at 1.0400. In the process, you are simultaneously selling EUR 100,000 (20 lots at $5,000 per lot) and buying 104,000 USD ($100,000 × 1.0400).
Result
The USD account will show a debit of USD 102,500 and the credit of USD 104,000. Therefore, the profit is USD1,500.
Note: Interest rate between the EUR and USD currencies has been disregarded in the above during the 2 day time period, which would have changed the profit calculation.
EUR/USD Example
You transfer a sum of $100,000 into your Forex account. The default setting of all trading accounts is 0.5% margin and leverage of 200:1. If you open a $10,000 position, then you are required to uphold a margin of $50 using 200:1 leverage. The calculation is simple, position size/leverage equals margin required. $10,000/200 = $50.
Trading Day One
As the investor, you foresee the EUR to gain in value against the USD. As a result, you buy $100,000 of the currency EUR/USD pair. The market price is quoted as 1.0250 / 1.0253. Therefore, you purchase EUR at 1.0253.
In the process of the above, you are buying EUR 100,000 (20 lots at $5,000 each) and selling USD 102,500 ($100,000 × 1.0250), as a margin of $500 ($100,000 × 0.5%) was used, while borrowing $99,500 ($100,000 - $500) from Forex.
Trading Day Two
The trade you bought has been a successful so far, as the EUR has risen against the USD. Now the quote for the EUR/USD is 1.0400 / 1.0403.
You now decide to take your profit by initiating a sell market order on the Forex trading platform. The sell market order is instantly executed, and 20 lots of EUR/USD is sold at 1.0400. In the process, you are simultaneously selling EUR 100,000 (20 lots at $5,000 per lot) and buying 104,000 USD ($100,000 × 1.0400).
Result
The USD account will show a debit of USD 102,500 and the credit of USD 104,000. Therefore, the profit is USD1,500.
Note: Interest rate between the EUR and USD currencies has been disregarded in the above during the 2 day time period, which would have changed the profit calculation.
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