Forex Trading

Example: Trading Forex

Forex Trading Example 1 – Long Position in EURUSD

Taking EURUSD as an example, let’s say the price is currently 1.2894/1.2896 and you want to buy, expecting the price to rise.

When you ‘buy’ a currency pair, you are in fact buying the first currency and selling the equivalent amount of the second currency in the pair.(Vice versa when you are selling a currency pair, you are in fact selling the first currency, and buying the equivalent amount of the second currency).

You buy 1 Lot, the equivalent of 100,000 EUR, at 1.2896 (128,960 USD). With an account on 100:1 leverage, your margin requirement will be 1,000 Euros or 1,289.60 US Dollars. This margin requirement will not be debited from your account, but will be required as a minimum credit balance on your account until the position is closed. The margin requirement may change over the duration of the trade, depending on the movement in the price of the currency pair.

Interest Adjustments/Financing Charges

The interest cost of your position is calculated daily, by applying the applicable ‘swap rate’ to the daily closing value of the position. The daily closing value is the amount of base currency that you are holding.

In this example, if you are long 1 lot of EURUSD, then financing will be charged on 100,000 Euros. The swap rate is calculated as a function of the difference in base interest rates between each individual currency in a pair.

Let’s say you hold this position for 15 days for a total interest charge of $25.

Each day's interest calculation will be different. Interest adjustments are calculated and posted to your account daily.

Closing the Position

Let’s assume that you are proved correct, and the price of EURUSD rises to 1.2965/1.2967. You decide to close your position and sell your 1 Lot at 1.2965 (129,650 USD).

Your overall profit will be as follows:

Profit = (Closing Price) – (Opening Price) – (Financing Charges)

129,650 – 128,960 – 25 = $665

Forex Trading Example 2 – Short Position in USDCHF

Taking USDCHF as an example, if the price is currently 0.93715/0.93727 and you want to sell, expecting the price to fall, your purchase price would be 0.93715 (93,715 CHF).

You sell 1 Lot, the equivalent to 100,000 USD, at 0.93715. With a 100:1 leverage, your margin requirement will be 1,000 US Dollars or 937.15 Swiss Francs.

Let’s say that you hold this position for a total of 25 days, earning a total financing credit of $35.

Closing the Position

Let’s assume that you are proved incorrect, and the price of USDCHF actually rises to 0.93900/0.93912. You decide to close your position and buy 1 Lot at 0.93912 (93,912 CHF).

Your overall loss will be as follows:

Loss = (Opening Price) – (Closing Price) + (Financing Charges)

93,715 – 93,912 + 35 = -$162


Benefits of Forex Trading

  • Ease of access. All you need is a computer with internet access and you can trade from anywhere in the world, 24 hours from Sunday 10.00pm to Friday 10.00pm.
  • The huge volume of FX traded each day means that it is highly liquid, giving you the confidence to trade in and out of positions with ease.
  • The massive volume traded also means that markets cannot be manipulated by any group of individuals. It is widely considered to be the closest example of a “perfectly competitive” market.
  • Leverage – the oportunity to magnify your gains but also magnify your loses.
  • Low costs – you are only charged “swap charges” which are interest charges on a daily basis. There is no commission when trading FX. Many brokers even allow clients to trade for zero commission, seeking instead to earn their money by including their fees in the bid/offer spread.

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