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Forex Trading| Article #229 : FOREX TRADING – AN EXAMPLE TRADE

In this installment of Forex trading, I’m going to give you an example trade so you can see how this all takes place. But before we get into that, I’m going to throw a couple more terms at you so you have a well rounded introductory education into Forex trading. Again, this is not meant to be an advanced tutorial on the subject.

Let’s first talk about spread. The spread is simply the difference between what you can sell the currency at, or the bid price, and the price which you can buy the currency at, or the ask price. The spread for the major currencies is usually about 3 pips under normal market conditions. Don’t worry, we’re going to get into what pips are next.  You can always get a summary of trading conditions at any period of time by going to your online account, if you should have one.

Okay, so what is a pip, other than one of the backing guys behind Gladys Knight?

A pip is the actual smallest unit when talking about the difference between the big price and the ask price of any currency. Let’s, as an example take EURUSD as a trade. If the bid price is quoted as 0.9875 and the ask price is quoted as 0.9878, the difference in United States dollars is 0.0003, or 3 pips. So each 0.0001 difference is 1 pip. This is a lot easier to say than one ten thousandth.

Okay, now that you have the basics of Forex trading down, let’s do an example trade so you can see just how this all takes place. When you break it down step by step, the process itself is very easy. The hard part of the process is to know what and when to sell.

Okay, let’s say that you believe that the Euro will gain strength against the US dollar.  What you want to do is buy euro now and sell it later at a higher price.

The first step is to buy the euro. Let’s say the quote on the euro is 0.9875 for the bid and 0.9878 for the ask. This means you can sell 1 euro for 0.9875 US dollars or buy 1 euro for 0.9878 US dollars. It’s not a big difference unless you’re talking about large currency amounts.
Now, the market moves in our favor. The EURUSD is not quoted at 0.9894 bid and 0.9896 ask. What you do is sell your euro that you bought at 0.9878 and sell it at 0.9894. That is a difference of 16 pips.

The final part of the process is to calculate your profit, which is done as follows:

You take the sell price minus the buy price times the size of the trade.

Let’s say you bought 100,000 euro with our original trade.  Our profit would then be…

(0.9894 minus 0.9878) multiplied by 100.000 = USD 140 Profit.

It is important to note that the profit is always shown in the secondary currency, which in this case is the US dollars since what you purchased and sold was euro dollars.

The good thing about the above transactions is that if you bought 100,000 euros you’d only have to have 1% of that amount in your actual account to pull off the trade since you can trade on margin.

Forex trading is exciting to say the least. Just remember that you can lose your shirt doing this if you don’t know what you’re doing and more importantly, don’t keep up with the market trends.

That is a subject all to itself that we’ll maybe take up in future articles.

Now, I wonder what time it is right now in Japan?

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