How Does Forex Trading Work?
|Currency Pair||Minimum Spread (pips)||Average Spread (pips)|
Forex Trading Example
Opening the Position
The price of the EURO against the US Dollar (EUR/USD) is 1.33623/1.33624, you decide to sell 2 standard lots (the equivalent of €200,000) at 1.33623.
The value of your position is €200,000 x 1.33623 = USD $267,246. The leverage on your trading account is 1:100 therefore the margin required to open the position is USD $267,246 / 100 = USD $2,672.46.
Closing the Position
One week later the EURO has fallen against the US Dollar to 1.32128/1.32129, you decide to take your profit by buying back 2 standard lots at 1.32129.
The gross profit on your trade is calculated as follows:
|Opening Price||€200,000 x 1.33623 = USD $267,246|
|Closing Price||€200,000 x 1.32129 = USD $264,259|
|Gross Profit on Trade||USD $ 2,988|
It is important to note that whist your position remains open, each night your account will be debited or credited the swap rate. The swap is expressed in pips and is the difference between the interest paid to borrow the currency that is being sold and the interest received from holding the currency that is bought.
In order to calculate the net profit on this trade your will need to include any swap charges, you may also need to include any commission charges if they are payable. You should be aware that if the market had moved in the opposite direction, you would have made a loss that could have exceeded your initial deposit.
RCM contract specification sheet provides further information regarding the currency pairs on offer and their spreads.