How Forex Works

Forex trading in examples

A Long Position EUR/USD: Buying EUR/USD (Profit example)

Assume you deposit € 40,000 on your Derivative Account with a margin requirement of 4%. This means that you can utilize a margin position of up to € 1,000,000

You believe that the Euro will strengthen against the dollar and you want to buy Euro now and sell it back later at a higher price.

We quote EUR/USD	We quote EUR/USD at Bid 1.2151 and Ask 1.2153, which means that you can sell 1 Euro for 1.2151 USD or buy 1 Euro for 1.2153 USD.
You buy Euro	You buy Euro 1,000,000, at the quote price of 1.2153 (ask price) per Euro + Commission 100 USD
The market turns	Later the market turns in favour of the Euro and the EUR/USD is now quoted at Bid 1.2200 and Ask 1.2202
You sell your Euro	You sell Euro at a Bid price of 1.2200 + Commission 100 USD
Profit/Loss	The profit is calculated as follows: (Sell Price - Buy Price) X size of trade - Commissions (1.2200-1.2153) X 1,000,000 - 200 = + USD 4,500 Profit

A Long Position EUR/USD: Buying EUR/USD (Loss example)

You believe that the Euro will strengthen against the dollar and you want to buy Euro now and sell it back later at a higher price.

We quote EUR/USD	We quote EUR/USD at Bid 1.2151 and Ask 1.2153, which means that you can sell 1 Euro for 1.2151 USD or buy 1 Euro for 1.2153 USD.
You buy Euro	You buy Euro 1,000,000; at the quote price of 1.2153 (ask price) per Euro + Commission 100 USD
The market turns	Later the market turns in favour of the Dollar and the EUR/USD is now quoted at Bid 1.2130 and Ask 1.2132
You sell your Euro	You sell Euro at a Bid price of 1.2130 + Commission 100 USD
Profit/Loss	The loss is calculated as follows: Sell Price - Buy Price X size of trade - Commission (1.2130-1.2153) X 1,000,000 - 200 = - USD 2,500 Loss

A Short Position EUR/USD: Selling EUR/USD (Profit example)

You believe that the Euro will weaken against the dollar and you want to sell EUR/USD.

We quote EUR/USD	We quote EUR/USD at Bid 1.2150 and Ask 1.2152, which means that you can sell 1 Euro for 1.2150 USD or buy 1 Euro for 1.2152 USD.
You sell Euro	You sell Euro 1,000,000, at the quote price of 1.2150 (bid price) per Euro + Commission 100 USD
The market turns	Later the market turns in favor of the Dollar and the EUR/USD is now quoted at Bid 1.2126 and Ask 1.2128
You buy back your Euro	You buy Euro at an Ask price of 1.2128 + Commission 100 USD
Profit	The profit is calculated as follows: Sell Price - Buy Price X size of trade - Commissions (1.2150-1.2128) X 1,000,000 - 200 = + USD 2,000 Profit

A Short Position EUR/USD: Selling EUR/USD (Loss example)

You believe that the Euro will weaken against the dollar and you want to sell EUR/USD.

We quote EUR/USD	We quote EUR/USD at Bid 1.2150 and Ask 1.2152, which means that you can sell 1 Euro for 1.2150 USD or buy 1 Euro for 1.12152 USD.
You sell Euro	You sell Euro 1,000,000, at the quote price of 1.2150 (bid price) per Euro + Commission 100 USD
The market turns	Later the market turns in favor of the Euro and the EUR/USD is now quoted at Bid 1.2170 and Ask 1.2172
You buy back your Euro	You buy Euro at an Ask price of 1.2172 + Commission 100 USD.
Profit	The profit is calculated as follows: Sell Price - Buy Price X size of trade - Commissions (1.2150-1.2172) X 1,000,000 - 200 = - USD 2,400 Loss

Interest Rate Differentials:
Different currencies pay different interest rates. It is inherently attractive to be a buyer of a currency that pays a high interest rate while being short a currency that has a low interest rate. Although such interest rate may not appear very large, the significance is much greater in a highly leveraged position.

Note that the profit or loss is always expressed in the secondary currency.