How-To: Forex Trading Examples

Forex trading examples

 

To better understand the process of trading forex, view our CFD examples below, which take you through both buying and selling scenarios.

 

CFD trading example 1: buying EUR/GBP

 

EUR/GBP is trading at 0.84950 / 0.84960.

You decide to buy €50,000 because you think the price of EUR/GBP will go up. EUR/GBP has a tier 1 margin rate of 0.20%, which means that you only have to deposit 0.20% of the total position’s value as position margin. Therefore, in this example your position margin will be £84.95 (0.20% x [€50,000 x 0.84955]).

Remember that if the price moves against you, it is possible to lose more than your investment of £84.95.

 

Outcome A: winning trade

 

Your prediction was correct and the price rises over the next hour to 0.85530 / 0.85540. You decide to close your long trade by selling at 0.85530 (the current sell price).

The price has moved 57 points (0.85530 – 0.84960) in your favour.

Your profit is ([€50,000 x 0.85530] – [€50,000 x 0.84960]) = £285.

 

Outcome B: losing trade

 

Unfortunately, your prediction was wrong and the price of EUR/GBP drops over the next hour to 0.84390 / 0.84400. You feel the price is likely to continue dropping, so to limit your losses you decide to sell at 0.84390 (the current sell price) to close the trade.

The price has moved 57 points (0.84960 – 0.84390) against you.

Your loss is ([€50,000 x 0.84960] – [€50,000 x 0.84390]) = £285.

 

CFD trading example 2: selling EUR/GBP

 

EUR/GBP is trading at 0.84950 / 0.84960.

Let’s assume poor German manufacturing data indicates that the euro is likely to fall against sterling in the coming days. You decide to sell €50,000 because you think the price of EUR/GBP will go down.

EUR/GBP has a tier 1 margin rate of 0.20%, which means that you only have to deposit 0.20% of the total position’s value as position margin. Therefore, in this example your position margin will be £84.95 (0.20% x [€50,000 x 0.84950]).

Remember that if the price moves against you, it is possible to lose more than your position margin of £84.95.

 

Outcome A: winning trade

 

Your prediction was correct and EUR/GBP drops over the next hour to 0.84450 / 0.84460. You decide to close your short trade by buying at 0.84460 (the current buy price).

The price has moved 49 points (0.84950 – 0.84460) in your favour.

Your profit is ([€50,000 x 0.84950] – [€50,000 x 0.84460]) = £245.

 

Outcome B: losing trade

 

Unfortunately, your prediction was wrong and the price of EUR/GBP rises over the next hour to
0.85430 / 0.85440. You feel the price is likely to continue rising, so to limit your losses you decide to buy at 0.85440 (the current buy price) to close the trade.

The price has moved 49 points (0.84950 – 0.85440) against you.

Your loss is ([€50,000 x 0.84950] – [€50,000 x 0.85440]) = £245.

 

Holding costs

 

If you hold your position past 5pm New York time (10pm UK time), your account will be debited or credited at the prevailing holding rate. If you have bought a higher yielding currency you will generally receive interest; if you have bought a lower yielding currency you will generally be charged interest.

 

John, David and Alexandra have worked on Wall Street for a combined 35 years, trading for huge firms like (now defunct) Lehman Brothers and Goldman Sachs trading the markets on behalf of high net worth individuals. After thousands of trades and hundreds of trading accounts, they are here to share the fruit of their work and knowledge with other traders. The trio divide their time between New York and London.

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