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 $128,420. That is a difference of 3 pips, or
in dollar terms ($128,420 – 128,390 = $30).
Total profit = US $30 on a deposit of $321
Example 2:
Now
in this example, imagine the trader once again buys EUR/USD when
trading at 1.2836/39. Just as before, the trader buys 100,000 Euros and
pays 128,390 dollars (100,000 x 1.2839).
However, the Euro weakens to 1.2833/36. Now, to minimize loses, the trader sells 100,000 Euros at 1.2833 and receives $128,330.
In
this case, the trader bought 100k Euros at 1.2839, paying $128,390 and
sold 100k Euros at 1.2833, receiving $128,330. That is a difference of
6 pips, or in dollar terms ($128,390 - 128,330 = $60).
