Forex Example

The key principle of forex trading is simple. You buy one currency with another currency at the present exchange rate, so that you are in effect going long of the first currency and short of the second currency. That is, your position will increase in value if the relative strength of the first currency against the second currency increases, as you can now sell the first currency back for a greater amount.

For instance, if you had bought GBP10,000 in May 2010 it would have cost you around USD14,500 at the prevailing GBP/USD exchange rate. By late October 2010 the pound had increased in value against the dollar, so you could now have closed out your position by selling your GBP10,000 for around USD16,000. You began with USD14,500 and you now have USD16,000, a profit of USD1500.

Example: buying the euro

Say the euro is trading against the dollar at 1.2750-1.2751 and you think the euro is set to rise. Using the MT4 platform you place an order to buy 5 contracts at the offer price of 1.2751.

Each contract is the equivalent of 100,000 of the base currency, in this case the euro, so you are buying the equivalent of EUR500,000 at 1.2751 which equals USD637,550.

Say you are right and the euro rises against the dollar to 1.2870-1.2871 later in the day. You decide to close your position by selling 5 contracts on the platform at the bid price of 1.2870.

So you are selling the equivalent of EUR500,000 at 1.2870 which equals USD643,500. Your profit on this position is therefore the difference between the amount you bought the euros for (USD637,550) and the amount you sold them for (USD643,500), which is USD5950.

Another way to look at this is that every contract is worth USD10 for every pip movement in the exchange rate. In this case the movement is 119 pips and you have bought and sold 5 contracts so the profit is 119 x 5 x USD10 = USD5950.