Forex Trading Examples
The key principle of forex trading is simple. You buy one currency with another currency at the present exchange rate, so 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 GBP 10,000 in mid-January 2017 it would have cost you around USD 12,100 at the prevailing GBP/USD exchange rate. By mid-September 2017 the pound had increased in value against the dollar, so you could now have closed out your position by selling your £10,000 for around $13,500. You began with $12,100 and you now have $13,500, a profit of $1400.
Example: buying the euro
Say the euro is trading against the dollar at 1.20504-1.20510 (remember we quote forex to fractions of a pip) and, due to a variety of factors, you think the euro is set to rise. You can choose either to buy a certain stake per pip as a spread bet, or to buy a certain number of CFD contracts, at the offer price of 1.20510.
For example, you might buy 10 CFDs at 1.20510. Each CFD contract (on the web-based platform) is the equivalent of 100,000 of the base currency, in this case the euro, so you are buying the equivalent of €100,000 at 1.20510 which equals $120,510.
Suppose you are right and the euro rises against the dollar to 1.21700-1.21706 later in the day. You decide to close your position by selling your 10 CFDs at the bid price of 1.21700. You are effectively selling at $121,700, making a profit of $1190 (this is converted into your account currency if necessary).
Alternatively, if you are spread betting, you might have bought £10 per pip at the offer price of 1.20510. To close your position you sell at the bid price of 1.21700. The difference between your opening price and your closing price is 119 pips so in this case your profit is 119 x £10 = £1190.
Whether you are spread betting or CFD trading, you will need to put down a margin deposit to open your position. This is typically a fraction of the full value of your position. The ratio of your margin to the value of your position is known as leverage. Getting great leverage on your position can help maximise the return on your spread bet or CFD investment, making it a critical element of the trade.