Tuesday, April 30, 2013

Forex Trade Sample

One of the most liquid and widely traded markets in the world, Forex trading enables you to speculate on the future direction of currencies through buying or selling the exchange rate of one country’s currency against another, with the aim of making a profit.

To Buy or to Sell?
Buying a currency pair, for example EUR/USD, simply means that you buy the first currency in the pair (EUR) while simultaneously selling the second currency in the pair (USD) on expectations that the cross rate price will rise in value and your profits will rise in line with any increase in that price.

Conversely, selling a currency pair simply means that you sell the first currency in the pair (EUR) while simultaneously buying the second currency in the pair (USD) on expectations that the price will fall and your profits rise.

Currencies can be either bought or sold, but they must be traded against each other.  There are over 150 currency pairs that can be traded but the most liquid with the highest turn-over are the “majors”. 

Major Currency Pairs
EUR/USD (Euro vs. US Dollar)
GBP/USD (UK Pound vs. US Dollar)
USD/JPY (US Dollar vs. Japanese Yen)
USD/CHF (US Dollar vs. Swiss Franc)
USD/CAD (US Dollar vs. Canadian Dollar)
AUD/USD (Australian Dollar vs. US Dollar)

Primary (base) vs. Secondary Currencies 
The primary currency, or the base currency, is the reference that defines the contract size.  The profit and loss calculation however is always on the secondary currency. Examples are as follows:

Currency Pair           Contract Size      Value of 1 pip     Value of 1 pip in US$
EUR/USD            € 100,000          US$ 10.00  US$ 10.00
GBP/USD   £ 100,000  US$ 10.00  US$ 10.00
USD/JPY   $ 100,000  ¥ 1,000   (Divide by current USD/JPY rate)
USD/CHF   $ 100,000  CHF 10.00  (Divide by current USD/CHF rate)
USD/CAD   $ 100,000  CAD 10.00  (Divide by current USD/CAD rate)
AUD/USD   AUD 100,000  US$ 10.00  US$ 10.00
Margin Requirements and Leverage 
In order to buy or sell 1 contract (lot) of a particular currency pair with ICMBrokers, an investor must have a minimum of $1,000 in the account, or about 1% margin.  In other words, a $1,000 initial margin is required for every Ccy 100,000 that is traded, which corresponds to a leverage of 1:100.

Though a 1% margin is initially required, ICMBrokers has no maintenance margin on standard accounts.  In order to guarantee that clients’ accounts do not extend into negative equity, the trading platform automatically closes all positions at the 5% Equity/Margin ratio. 

Profit and Loss Calculation Examples 
Buy 5 EUR/USD at 1.3150  |  Sell 5 EUR/USD at 1.3190
   1.3190 (open price) x 5 (lots traded) x 100,000 (contract size) = 659,500
   1.3150 (close price) x 5 (lots traded) x 100,000 (contract size) = 657,500
                                                                                                             $  2,000 (Profit)
 Sell 3 USD/CHF at 1.1205   |   Buy 3 USD/CHF at 1.1150

   1.1205 (open price) x 3 (lots traded) x 100,000 (contract size) = 336,150
   1.1150 (close price) x 3 (lots traded) x 100,000 (contract size) = 334,500
                                                                                                          CHF 1,650 (Profit)

In order to obtain USD value, the CHF Profit amount must be divided by the Closed Price
CHF 1,650 ÷ 1.1150 (closed price) = $1,479.82

To know more about our ICM Brokers FX Instruments please click the linkICM Brokers FX Instruments

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