Example of a Profitable Transaction in FOREX

Example of a Profitable Transaction in FOREX

To make profits in forex, trader can enter the market as a * buy position * (known as would be "long") or a * sell position * (known as would be "short").

For discussion, suppose you have been studying the EURO.

Your trading methods, rules, strategies, etc., can tell you that prices will increase during a certain timeframe. So you buy EUR / USD pair (or, technically, you will simultaneously buy euros, the base currency and sell dollars).

You open your hand trading station software (provided to you free by the online broker), which resides on your computer and you will see that the EUR / USD pair is trading at:

REMEMBER: the quote to the left of the / (1.3242) refers to the offer or "sell" price (which will be available in U.S. dollars when you sell EUR). Quote of the right / (1.3245) is used to obtain the ask or "buy" price (which you must pay in U.S. dollars if you buy euros).

So, as we see that the market price for EUR / USD pair will go higher, you enter the * position * buy the market. For simplicities sake, let's say you bought one lot of 1.3245. As long as you sell back the pair at a higher price and then make money.

But do not worry. This seemingly elaborate process is handled and even calculated for you by a broker software mentioned above. The chart software and offer the board in accordance with all sides of currencies.

To illustrate a typical FX sells, consider this scenario includes USD / JPY currency pair:

REMEMBER ~ Selling ("going short") the currency pair implies selling the first, base currency, and buying the second, quote currency. You sell the currency pair if you think the base currency (U.S. dollars) will go down in terms of the offer currency (JPY), or equivalently, the quote currency (JPY) will go up in terms of base currency (USD).

NOTE: While the profit calculations, the short sale scenario below, may seem a little complicated if you've never been in the Forex market before, trust us when we say "the process is nearly seamless through your broker trade station (software). We're just showing you this thought process below so you can see how much profit is happening even when

Selling the currency pair.

The current bid / ask price for USD / JPY is 105.26/105.30, meaning you can buy $ 1 U.S. for 105.30 Japanese yen or sell $ 1 U.S. for 105.26 yen.

Suppose you decide that the U.S. dollar (USD) is overvalued against the yen (JPY). To execute this strategy, you will sell Dollars (simultaneously buying yen) and then wait for the exchange rate to increase.

So you make a trade: the sale of $ 100,000 and purchase 10,526,000 yen. (Remember, a 1% margin, your initial margin deposit would be $ 1,000.)

As expected, USD / JPY falls to 104.26/104.30, meaning you can now buy $ 1 to U.S. $ 104.30 Japanese yen, or sell for U.S. $ 1 104.26

Since you're short dollars (and are long yen), will now have to sell dollars and buy back yen to realize any profit.

You buy 100,000 U.S. dollars at the current USD / JPY rate at 104.30, and receive 10.43 million yen. Since you originally bought (paid for) 10,526,000 yen, your profit is 96,000 yen.

To calculate your P & L, in terms of U.S. dollars, simply divide 96,000 from the current USD / JPY rate at 104.30.

Total profit = U.S. $ 920.42




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