Currency Trading Basics

All currency trades involve the buying of one currency and the selling of
another, simultaneously. Currency quotes are given as exchange rates; that
is, the value of one currency relative to another. The relative supply and
demand of both currencies will determine the value of the exchange rate.

When a currency trader places a trade he wants the currency purchased to
appreciate in value versus the currency sold. His ability to determine the
direction that the exchange rate will move, will dictate his gain or loss
in a trade. Let's do an example with a currency quote obtained from the
forex trading system.

Forex Trade Example

The current bid-ask price for EUR/USD is 1.0120/1.0126, meaning you can buy
1 euro (EUR) for 1.0126 US dollars (USD).

Suppose you feel that the EUR is undervalued against the dollar. To execute
this strategy, you would buy Euros (simultaneously selling Dollars) and
then wait for the exchange rate to rise.

So you make the trade: purchasing 100,000 EUR (1 lot) and selling 101,260
Dollars. (Remember, at 1% margin, your initial margin deposit would be
1,000 Euros.)

As you expected, EUR/USD rises to 1.0236/42. Since you bought Euros and
sold Dollars in your previous trade, you must now sell Euros for Dollars to
realize any profit. You can now sell 1 EUR for 1.0236 Dollars. When you
sell the 100,000 Euros at the current EUR/USD rate of 1.0236, you will
receive 102,360 USD.

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

Total profit = US $1100.00
 

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