To help you understand how forex trading works, view our CFD examples below, which take you through both buying and selling scenarios.
CFD trading example 1: buying EUR/USD
EUR/USD is trading at 1.34657 / 1.34665.
You decide to buy €50,000 because you think the price of EUR/USD will go up. EUR/USD has a tier 1 margin rate of 3.00%, which means that you only have to deposit 3.00% of the total position’s value as position margin. Therefore, in this example your position margin will be $2,019.97 (3.00% x [€50,000 x 1.34665]).
Remember that if the price moves against you, it is possible to lose more than your initial position margin of $2,109.85.
Outcome A: winning trade
Your prediction was correct and the price rises over the next hour to 1.35057 /1.35065. You decide to close your long trade by selling at 1.34057 (the current sell price).
The price has moved 39.2 points (1.35057 - 1.34665) in your favour.
Your profit is ((€50,000 x 1.35057) - (€50,000 x 1.34665)) = $67,528.5 - $67,332.5 = $196.
Outcome B: losing trade
Unfortunately, your prediction was wrong and the price of EUR/USD drops over the next hour to 1.34157 / 1.34165. You feel the price is likely to continue dropping, so to limit your losses you decide to sell at 1.34157 (the current sell price) to close the trade.
The price has moved 50 points (1.34157 - 1.34665) against you.
Your loss is ((€50,000 x 1.34157) - (€50,000 x 1.34665)) = $67,078.5 - $67,332.5 = ($254).
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CFD trading example 2: selling EUR/USD
In this example, EUR/USD is trading at 1.34657 / 1.34665
Assume you want to sell €50,000 because you think the price of EUR/USD will go down. The EUR/USD has a margin rate of 3.00%, which means that you only have to deposit 3.00% of the total position’s value as position margin. Therefore, in this example your position margin will be $2,109.85 (3.00% x (€50,000 x 1.34657)).
Remember that if the price moves against you, it is possible to lose more than your initial position margin of $2,109.85.
Outcome A: winning trade
Your prediction was correct and the price drops over the next hour to 1.34157 / 1.34165. You decide to close your short trade by buying at 1.34165 (the current buy price).
The price has moved 49.2 points (1.34657 – 1.34165) in your favour.
Your profit is ((€50,000 x 1.34657) - (€50,000 x 1.34165)) = $67,328.5 - 67,082.5 = $246.
Outcome B: losing trade
Unfortunately, your prediction was wrong and the price of EUR/USD rises over the next hour to 1.35057 / 1.35065. You feel the price is likely to continue rising, so to limit your losses you decide to buy at 1.35065 (the current buy price) to close the trade.
The price has moved 40.8 points (1.34657 - 1.35065) against you.
Your loss is ((€50,000 x 1.34657) - (€50,000 x 1.35065)) = $67,328.5 - $67,532.5 = ($204).
Holding costs
If you hold the position past 5:00 pm Eastern Time, your account will be debited or credited at the prevailing holding rate. If you have bought a higher yielding currency you may receive interest; if you have bought a lower yielding currency you may be charged interest.
For more details on our FX overnight holding rates, please refer to the 'Product Overview' section for the relevant pair.
Find out more about forex trading on topics like trading forex using candlestick patterns, and simply day trading strategies.
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