How to trade Forex

Here's a typical trade scenario:

Let's assume the current bid/ask quote for the EUR/USD is 1.3802/05 and you want to take a long (or Buy) position because you believe the Euro will gain on the Dollar.

We'll also assume that you are only buying 1 Standard Lot.

When you buy this pair, you are actually buying 100,000 Euros for $138,050 US Dollars. Using leverage, at 100:1, you would need to have an initial margin deposit of $1,381 for this trade to take place.

Let us then assume that the Euro indeed gains on the Dollar and trades now at 1.3865/68 and you decide to sell and take your profits. You would sell you 1 Standard Lot at a profit of 60 pips (1.3865-1.3805).

When you sell this pair, you are selling 100,000 Euros for $138,650 US Dollars. Since you bought the 100,000 Euros for $138,050 and sold them for $138,650, you made a cash profit of $600.

If on the other hand the Euro went down to 1.3775/78 and you sold at 1.3775, you would have a loss of 30 pips, or $300. ($138,050-$137,750).

When using margin and leverage, it is imperative that you employ sound risk management rules to ensure that your account equity never falls below margin requirements -- if it does, your position will be automatically liquidated and you will sustain a significant loss.

by Eugene Ng -

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