Example Forex Trade
An Example Forex Trade
Let’s say that from your forex trading charts (technical analysis) you believe you see a rising trend forming in the EUR/USD pair. The economic news (fundamental analysis) supports the idea that the euro may be strengthening and/or the dollar weakening. So you decide to buy EUR/USD. In your mini forex trading account you open one lot (10,000) at our example ask price of 1.3644. You are buying 10,000 euros for US$13,644. But remember that you will use leverage, so you do not need to have anywhere near that much money in your account.
The margin requirement on your account is 1%, so you are only giving US$136.44 of your own money to make this trade. (But be aware that most brokers require a higher margin on trades that stay open over the weekend, so if you do not plan to close during the same week, you may need twice this amount in your account to cover this trade.) Then you wait. As you expected, the price quickly rises. After a short time it has risen by 50 pips to 1.3694 (ask price). Your trade has been successful. You decide to sell.
Remember that the bid price, which you will get when you sell, is 2 pips lower than the ask price in our example. So those 2 pips go to the broker and your profit is 48 pips.
So How Much Did You Make?
48 pips … so how much is that in dollars?
Since USD is the quote currency in this pair, it is simple to work out your profit in terms of dollars. Where the price is expressed to four decimal places, in the quote currency 1 pip is 0.0001 of a lot. So here 1 pip is $1.
You just made $48.
And how much is it in Euros?
If your own currency is Euros, or if you are trading a different currency pair where USD is the base currency rather than the quote currency, you may prefer to keep records of your profits in terms of the base currency. In the base currency, where the price is expressed to four decimal places, 1 pip = 0.0001 x lot size / closing price.
So in our example forex trade, 1 pip = 0.0001 x 10,000 / 1.3694 = 0.7302 Euros.
Your profit of 48 pips is 48 x 0.7302 = 35.05 Euros.
Remember, this is a fictional example. There are no guarantees that your trades will make this amount or be successful at all. We have said this before but we will say it again. You could lose money. In fact, it is certain that sometimes you will. Let’s look next at what happens then.
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