Calculating Profit and Loss
Example 1:
Imagine the
current bid/ask for EUR/USD is EUR/USD: 1.2836/39, meaning a trader can
buy 1 euro for 1.2839 or sell 1 euro for 1.2836.
Suppose a
trader decides that the Euro is undervalued against the US dollar and
expects the value of the Euro to rise. To execute this strategy, a
trader would buy Euros (simultaneously selling dollars), and then wait
for the exchange rate to rise.
Therefore, the trader places the
order to buy 100,000 Euros and pays 128,390 dollars (100,000 x 1.2839)
for that order. Remember, at a leverage rate of 400:1, the traders
deposit would be approximately $321 for this trade.
As expected,
the Euro strengthens to 1.2842/44. Now, to realize the profits, the
trader places an order to sell 100,000 Euros at the current rate of
1.2842, and receive 128,420 dollars for that trade.
The trader
bought 100k Euros at 1.2839, paying $128,390. Then the trader sold 100k
Euros at 1.2842, receiving $12
...
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