Two simple Forex trades

Two simple Forex trades

Are you interested in investing in currency? Not sure how this all works? Then read on for a simple Forex trading example!

Imagine you opened an account with an online broker and made a margin deposit of $1,000. Your broker offers “matching” so you can trade the standard lot size of 100,000 units per 1,000 deposits.

You’ve done your research and feel pretty confident that the euro will rise in the short term, so you decide to place 100,000 on the trade.

The market opens and your broker gives you a quote of EUR/USD = EUR 1.4425. You sell 144,250 USD at this rate to buy 100,000 EUR.

A few days later the euro rises to 1.4535, you decide to sell 100,000 euros at that price and you will be paid 145,350 USD. Without taking into account any margin spread, your profit would be $145,350-$144,250 = $1,100.

Now let’s look at a long-term strategy.

Let’s say you believe that the Swiss Franc (CHF) will strengthen against the Japanese Yen (JPY) over the next two months.

However, to minimize risk, you decide to take a smaller position and place 10,000 yen against the franc. Your broker gives you a quote of CHF/JPY = 98.35

Now to pull off this long term trade you need to use a strategy called ‘margin trading’ and a tactic called ‘trading’.

This is because Forex on a daily basis is a ‘spot trading’ market and the only way to carry a margin position forward in the long term is to do a ‘swap’. A swap is a method of buying and selling a currency pair simultaneously on two different dates.

In this case, you would trade CHF/JPY on your first trade and set your position two months ahead (the time you expect it to take for the franc to appreciate against the yen).

So you agree to sell 10,000 JPY for CHF at 98.351, then trade your position for two months at a forward rate of 98.45 CHF – ie. – buy CHF for 984,500.

Within a month the exchange rate has risen and you must move your position forward another month by buying back the yen at a new rate of 97.40 for 970,400.

When the position is closed at two months, both trades are settled. Your JPY account is debited and credited ¥10,000 at the same time. Your CHF account is debited with CHF 970,400 and credited with CHF 984,500 — for a profit of CHF 14,100.

Convert this back to JPY for a profit of ¥1,373,340.

#simple #Forex #trades

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