Forex Trading Examples
Imagine the USD / JPY rate is quoted at “117.00 / 02″. This quote represents the bid/offer spread for USD vs. Japanese Yen.
The offer rate of 117.02 is the rate at which you can exchange your Japanese Yen for USD or, in other words, Purchase USD with Japanese Yen, or BUY USD and SELL JPY.
The bid rate of 117.00 is the rate at which you can Sell USD to buy Japanese Yen.
You believe that the US Dollar will strengthen vis–vis the Japanese Yen, and decide to buy or “go long” 500,000 USD @ 117.02 (the offer price).
Customer buys USD 500,000 @ 117.02.
|Initial Outlay (using 1% margin)||USD5,000|
Your prediction is correct and the US Dollar appreciates against the Japanese Yen. The quote on USD / JPY is now 117.65 / 67. To close your position, you decide to sell USD 500,000 @ 117.65 (the bid price).
Customer Sells USD 500,000 @ 117.65
Size of trade x (sell price – buy price) = profit & loss in secondary currency
500,000 x (117.65 – 117.02) = JPY315,000 profit
Or, converting the JPY 315,000 back to USD at a rate of 117.65
(Profit/loss / USD rate) = profit & loss USD
(315,000 / 117.65) = USD 2,677.31 profit
By closing your position to realize a gross profit of USD 2,677.31
The total spread cost for the trade is USD 83.80; therefore the profit on the trade would total USD 2593.51. If you misread the market direction, your total loss would be USD 2931.22.
The preceding example is for information purposes only, and may not reflect actual performance of the quoted currencies.
1. Trader x has an account of USD 50’000. He buys EUR/USD 500’000 @ 1.1500 at the market and places a stop loss order at 1.1460.
2. At this point his maximum risk is USD 2’000 and his margin utilisation is 10%, well above the minimum.
3. During the day the market fluctuates and initially moves down to 1.1480.
4. At this point trader x has an unrealised loss of USD 1’000 and his margin utilisation has fallen to 9.60% reflecting the effect of the downward move on his margin capacity.
5. Later still the price moves back up to 1.1550 and trader x decides to take profit.
6. He sells at 1.1550 making a USD 2’500 profit which represents a 5% return on his account value.
7. Note that trader x took only a risk of USD 2’000 and made a return of USD 2’500 this equates to a risk/reward ratio of 1.25.
8. A high risk reward ratio is what every trader should be aiming for.
9. The viewer should note that the example above is a random case scenario and in no way is meant to allude that the potential for profit is greater than the potential for loss in foreign exchange trading.