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To help understand the process of trading forex, view our CFD examples below, which take you through both buying and selling scenarios.
EUR/USD is trading at 1.1151/1.1152.
You decide to buy €50,000 because you think the price of EUR/USD will go up. EUR/USD has a tier 1 margin rate of 2%, which means that you only have to deposit 2% of the total position’s value as position margin. Therefore, in this example your position margin will be US$1115.15 (2% x (€50,000 x 1.11515)) or S$1527.76, assuming an exchange rate of 1.3700.
Remember that if the price moves against you, it is possible to lose more than your initial position margin of US$1115.15 / S$1527.76.
Your prediction was correct and the price rises over the next hour to 1.1209/1.1210. You decide to close your long trade by selling at 1.1209 (the current sell price).
The price has moved 57 points (1.1209 – 1.1152) in your favour.
Your profit is ((€50,000 x 1.1209) – (€50,000 x 1.1152)) = US$285 (or S$390.45)
Unfortunately, your prediction was wrong and the price of EUR/USD drops over the next hour to 1.1095 / 1.1096. You feel the price is likely to continue dropping, so to limit your losses you decide to sell at 1.1095 (the current sell price) to close the trade.
The price has moved 57 points (1.1152 – 1.1095) against you.
Your loss is ((€50,000 x 1.1152) – (€50,000 x 1.1095)) = -US$285 (or S$390.45)
EUR/USD is trading at 1.1151/1.1152.
Let’s assume poor German manufacturing data indicates that the euro is likely to fall against the US dollar in the coming days. You decide to sell €50,000 because you think the price of EUR/USD will go down.
EUR/USD has a tier 1 margin rate of 2%, which means that you only have to deposit 2% of the total position’s value as position margin. Therefore, in this example your position margin will be US$1115.15 (2% x (€50,000 x 1.11515)), or S$1527.76, assuming an exchange rate of 1.3700.
Remember that if the price moves against you, it is possible to lose more than your initial position margin of US$1115.15 / S$1527.76.
Your prediction was correct and EUR/USD drops over the next hour to 1.1101 / 1.1102. You decide to close your short trade by buying at 1.1102 (the current buy price).
The price has moved 49 points (1.1151 – 1.1102) in your favour.
Your profit is ((€50,000 x 1.1151) – (€50,000 x 1.1102)) = US$245, or S$335.65.
Unfortunately, your prediction was wrong and the price of EUR/USD rises over the next hour to 1.1199 / 1.1200. You feel the price is likely to continue rising, so to limit your losses you decide to buy at 1.1200 (the current buy price) to close the trade.
The price has moved 49 points (1.1200 – 1.1151) against you.
Your loss is ((€50,000 x 1.1151) – (€50,000 x 1.1200)) = -US$245, or -S$335.65.
If you hold your position past 5pm New York time , your account will be debited or credited at the prevailing holding rate. If you have bought a higher yielding currency you will generally receive interest; if you have bought a lower yielding currency you will generally be charged interest.
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DISCLAIMER
Trading in foreign exchange (“Forex”) on margins entails high risk and is not suitable for all investors. Past performance is not an indication of future results. In this case, as well, the high degree of leverage can act both against you and for you. Before you decide to invest in foreign exchange, you should carefully assess your investment objectives, experience, financial possibilities and willingness to take risks. There is a possibility that you will lose your initial investment partially or completely. Therefore, you should not invest any funds that you cannot afford to completely lose in a worst-case scenario. You should also be aware of all the risks associated with foreign exchange trading and contact an independent financial advisor in case of doubt.
Leverage enables traders, using a relatively small amount of money, to take a position that is many times the initial investment. This leverage effect can work both in your favour and to your detriment. The Forex market opens up the possibility to utilize this leverage effect to a high degree; at the same time, however, it also opens up the risk of experiencing high losses. Please trade with caution when you use leverage in trading or investing. Your risk is particularly not limited to the initial investment, but can quickly fall into a negative range in the event of strong movements, meaning you may be obligated to pay far more than your initial wager.