Trading Rules & Examples
Trading Examples for Forex
The MetaTrader 4 trading software which is used at FxGravity includes a full back office function that make it easy for the trader to realize the value of open positions as well as the profit and loss of closed trades. However, it is important that traders understand how a trade works and how to calculate profits and losses manually.
The Foreign Exchange Market (FX) is the arena in which one nation’s currency is exchanged for that of another at a mutually agreed rate. 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. All currencies are traded in pairs, with the ‘base’ currency being the first currency of the pair and the ‘quote’ or ‘term’ currency being the second currency in the pair.
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|
At FxGravity, in order to buy or sell 1 contract (lot) of a particular currency pair the client 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. If the trader has less than $1,000 they can still trade but this will be with less than 1 lot.
FxGravity has no maintenance margin however a 1% margin is initially required 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 1.3450 | Sell 5 EUR/USD at 1.3490
1.3450 (open price) x 5 (lots traded) x 100,000 (contract size) = 672,500
1.3490 (close price) x 5 (lots traded) x 100,000 (contract size) = 674,500
$ 2,000 (Profit)
- Buy 5 EUR/USD at 1.3156 | Sell 5 EUR/USD at 1.3124
1.3156 (open price) x 5 (lots traded) x 100,000 (contract size) = 657,800
1.3124 (close price) x 5 (lots traded) x 100,000 (contract size) = 656,200
$ 1,600 (Loss)
- Sell 3 USD/CHF at 0.8982 | Buy 3 USD/CHF at 0.8924
0.8982 (open price) x 3 (lots traded) x 100,000 (contract size) = 269,460
0.8924 (close price) x 3 (lots traded) x 100,000 (contract size) = 267,720
CHF 1,740 (Profit)
- Sell 3 USD/CHF at 0.9141 | Buy 3 USD/CHF at 0.9191
0.9141 (open price) x 3 (lots traded) x 100,000 (contract size) = 274,230
0.9191 (close price) x 3 (lots traded) x 100,000 (contract size) = 275,730
CHF 1,500 (Loss)
In order to obtain USD value, the CHF Profit amount must be divided by the Closed Price CHF 1,740 ÷ 0.8924 (closed price) = $1,949.79.