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Forex Trading Examples

In forex, a trade involves the simultaneous buying of one currency and the selling of another. Forex quotes (the prices of currencies) are given as exchange rates; in other words, as the value of one currency relative to another. Relative supply and demand for both currencies that make up a given currency pair determine the actual exchange rate value.

The trader wants the currency purchased to appreciate in value versus the currency sold. The FX trader's ability to determine the direction that the quote will move, will dictate his gain or loss in a forex trade (in our free training and e-books, you will learn that trading is not about guessing or having a "feel" for the market, but about implementing specific techniques). In the example below, an actual quote was obtained from the trading software.

Example of a forex trade

Let's say that the current quote for EUR/USD is 1.0120/1.0126 (to understand how to read forex quotes, click here).

You feel that the euro will appreciate in value against the dollar, so you buy 100,000 EUR (1 lot) at 1.0126 (101,260 Dollars). (At 1% margin, your initial margin deposit for this position is 1,000 Euros or 1,012.60 USD.) After entering your position, you automatically place a sell stop order 30 pips away from your entry point (at 1.0096), just in case the Euro goes down. (Having an active stop loss in place when trading forex is essential to control the amount that you can lose if the price goes against you. This is part of smart money management and will play a big role in improving a trader's probability of succeeding. The 30-pip stop that we are using in this example is completely arbitrary and should not be used on ever single trade. The correct way to set stops you will learn in our free, live training or from our mini trading ebook and standard forex e-book).

As you expected, EUR/USD goes up 1.0236/42 (bid/ask). You then sell your Euros for Dollars to realize your profit. Since at the current price, you can sell 1 Euro for 1.0236 Dollars, when you sell the 100,000 Euros (1 lot) at the current quoted price of 1.0236, you receive 102,360 USD.

Since you originally sold (paid) 101,260 USD, your profit is US $1100.

Total profit = US $1100.00 (109% return on an initial margin deposit of 1,000 Euros)

Increasing leverage increases risk. In the example above, if the price would have moved by the same amount in the opposite direction, a loss of $1100 would have ensued.

Practice your trading for free on our live forex trading demo.