Currency
Trading Examples
All currency
trades involve the buying of one currency and the selling of another,
simultaneously. Currency quotes
are given as exchange rates; that is, the value of one currency
relative to another. The value of the exchange rate in the currency
market is determined by the relative supply and demand of both currencies.
When a currency
trader places a trade he wants the currency purchased to appreciate
in value versus the currency sold. His ability to determine the
direction that the exchange rate will move, will dictate his gain
or loss in a forex transaction. Let's do an example with a currency
quote obtained from the currency trading system.
Example
of a currency trade
The current
bid-ask price for EUR/USD is 1.0120/1.0126, meaning you can buy
1 euro (EUR) for 1.0126 US dollars (USD). [If
you need help understanding how to interpret currency quotes, click
on this link.]
Suppose you
feel that the EUR will appreciate in value against the dollar. To
execute this strategy, you would buy Euros with dollars and then
wait for the exchange rate to rise.
So you make
the trade: purchasing 100,000 EUR (1 lot) at 1.0126 (101,260 Dollars).
(Remember, at 1% margin, your initial margin deposit would be 1,000
Euros or 1,012.60 USD.) Automatically you set a stop loss of 30
pips (or $300) in case the Euro goes down, by placing a sell stop order at
1.0096. (Having a stop loss in place when trading currencies is
extremely important in case the currency bought or sold goes against
you. Although no one likes to take a loss, placing stop losses in
currency trading is part of smart money management and will play
a big role in improving a currency trader's potential for success.
The example shown here of a 30 pip or $300 stop loss is completely arbitrary
and should by no means be used in ever currency transaction. The
free currency trading training
for our customers will include the setting of proper stop losses).
As you expected,
EUR/USD rises to 1.0236/42. Now you must sell Euros for Dollars
to realize any profit. You can now sell 1 EUR for 1.0236 Dollars.
When you sell the 100,000 Euros at the current EUR/USD rate of 1.0236,
you will receive 102,360 USD.
Since you originally
sold (paid) 101,260 USD, your profit is US $1100.
Total profit
= US $1100.00 (110% return on an initial margin deposit of 1,000
Euros - increasing leverage increases risk)
In this example, a move in price in the opposite direction could have caused a loss equivalent to the profit shown above.
To
sign up for a live 30-day free demo of our currency trading software,
click on this link...
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