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Example of a Profitable Transaction in FOREX
To make a profit, in the FOREX, a trader can enter the market
as a *buy position* (known as going "long") or a *sell
position*(known as going "short").
For discussion, let's assume you've been studying the
EURO.
Your trading methods, rules, strategies, etc., tell you that
prices will rise during a particular timeframe. So you buy the
EUR/USD pair (or, technically, you will simultaneously buy euros,
the base currency, and sell dollars).
You open up your handy trading station software (provided to
you for free by the online broker), which resides on your
desktop, and you see that the EUR/USD pair is trading at:
>
REMEMBER: the quote to the left of the / (1.3242) refers to
the bid or "sell" price (what you obtain in USD when you sell
EUR). The quote to the right of the / (1.3245) is used to obtain
the ask or "buy" price (what you have to pay in USD if you buy
EUR).
So, since you believe that the market price for the EUR/USD
pair will go higher, you will enter a *buy position* in the
market. For simplicities sake, let's say you bought one lot at
1.3245. As long as you sell back the pair at a higher price, then
you make money.
But, no worries. This seemingly elaborate process is handled,
and even calculated for you, via the broker's software mentioned
above. The chart software and the quote board are in agreement
with all sides of the currencies.
To illustrate a typical FX SELL trade, consider this scenario
involving the USD/JPY currency pair:
REMEMBER ~ Selling ("going short") the currency pair implies
selling the first, base currency, and buying the second, quote
currency. You sell the currency pair if you believe the base
currency (USD) will go down relative to the quote currency (JPY),
or equivalently, that the quote currency (JPY) will go up
relative to the base currency (USD).
NOTE: while the Profit Calculations, on the Short-sell trade
scenario below, may seem somewhat complicated if you've never
been in the FOREX market before, trust us when we say, "this
process is nearly seamless through your broker trade station
(software). We're just showing you this thought-process below so
you can SEE how a PROFIT occurs even when
SELLING a currency pair.
The current bid/ask price for USD/JPY is 105.26/105.30,
meaning you can buy $1 US for 105.30 Japanese YEN or sell $1 US
for 105.26 YEN.
Suppose you decide that the US Dollar (USD) is overvalued
against the YEN (JPY). To execute this strategy, you would sell
Dollars (simultaneously buying YEN), and then wait for the
exchange rate to rise.
So you make the trade: selling US $100,000 and purchasing
10,526,000 YEN. (Remember, at 1% margin, your initial margin
deposit would be $1,000.)
As you expected, USD/JPY falls to 104.26/104.30, meaning you
can now buy $1 US for $104.30 Japanese YEN or sell $1 US for
104.26
Since you're short dollars (and are long YEN), you must now
buy dollars and sell back the YEN to realize any profit.
You buy US $100,000 at the current USD/JPY rate of 104.30, and
receive 10,430,000 YEN. Since you originally bought(paid for)
10,526,000 YEN, your profit is 96,000 YEN.
To calculate your P&L in terms of US dollars, simply
divide 96,000 by the current USD/JPY rate of 104.30.
Total profit = US $920.42
Omar Vargas is a freelance writer with articles published in a
number of places. You can learn more about Forex trading and its
great advantages over other kind of business at this useful
website: http://www.1-forex.com
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