FOREX Trading Example
Example 1: LONG GBP/USD (Great British Pound/ United States Dollar)
On the 1st Friday of the month, the current GBP/USD trading price is assumed to be 1.6286/1.6288. Traders are concerned about the employment situation in the United States, and expecting the non-agricultural payrolls to be worse than economist’s expectation. You expect the dollar to be weak, while the pound will be stronger than the dollar. You decide to buy (LONG) 10,000 GBP/USD at a price of 1.6288. For this trading position with your leverage is 50:1, the initial margin of 325.76 USD (10,000*1.6288/50) is required. As per your expectation, pound is stronger against the dollar. When the new trading price of GBP/USD is 1.6350/1.6352, you may decide to take profit at the price 1.6350 (selling settlement price).
Result: Buying price was 1.6288 and selling price was 1.6350, up 62 pips. Your profit is: (1.6350-1.6288) x 10,000 = 62 USD The profit/loss is calculated accordingly to the quote currency in the currency pair. Profit/Loss Calculation: (The difference between close position price and open position price) x trading volume.
However, if the non-agricultural payroll is better than expected, the dollar is stronger than the pound. If the GBP/USD trading price drops to 1.6230, you will lose (1.6288-1.6230) x 10,000 equals to 58 USD.
Example 2: SHORT EUR/USD (EURO/ United States Dollar)
In the mid-July, EUR/USD trading price is 1.4360/1.4361.
Investors are still worried about the impact of sovereign debt crisis, you expect the euro to fall relative to the dollar. You have decided to sell (SHORT) 10,000 EUR/USD at the price 1.4360.
Assuming that you are correct, the euro is depreciates against the dollar. When the EUR/USD new price is 1.4251, you decided to take profit. The new trading price is 1.4250/1.4251, and your closing/buyback price is 1.4251 (buying settlement price).
Result: Buying price is 1.4360, the selling price is 1.4251, down 109 pips, and the profit is: (1.4360 - 1.4251) x 10,000 = 109 USD.
Another scenario, if dollar is weaken overnight and pushes the euro up 130 pips to 1.4490, you will lose (1.4490 – 1.4360) x 10,000 equals to 130 USD.
CFD Trading Example
Example 1: BUY XYZ PLC
In this example, XYZ PLC is trading at 1599p/1600p (Pence) on the London Stock Exchange. Assumed that you BUY
1000 units of CFD share because you think the price will up.
The XYZ PLC initial margin requirement is 5%, which means you need to deposit 5% of the position value as an initial margin. For this example, your initial margin is 800 GBP, 5% (1000 units x 1600p buying price).
Please remember: if the price movement fluctuates against you, your losses may exceed the initial margin of 800 GBP.
Scenario 1: Profit
Your prediction is correct, when the price up to 1625p/1626p. You decided to take profit at 1625p (new selling price). Price up 25 points (1625p-1600p). 25p*1000 units equals to 250 GBP is your profit.
Scenario 2: Loss
Unfortunately, your prediction is wrong. The price of XYZ PLC falls to 1549p/1550p int the next period. You expect the price may continue to drop so in order to control the potential loss, you decided to cut loss at 1549p (new selling price). The price is at your disadvantage, drop 51 points (1600p - 1549p). 51p*1000 units equals to 510 GBP, which is your loss.
Example 2: SELL XYZ PLC
In this example, XYZ PLC is trading at 1599p/1600p (Pence). Assumed you SELL 1000 units of CFD share because you
think the price will down.
XYZ PLC initial margin requirement is 5%, which means you need to deposit 5% of the position value as an initial margin. For this example, your initial margin is 799.50 GBP, 5% (1000 units x 1599p selling price).
Please remember: if the price movement fluctuates against you, your losses may exceed the initial margin of 799.50 GBP.
Commission
Commission is charged for each CFD share transaction. For UK shares trading, commission rate for each trade is 10 basis points (0.10%) of the position value, and the minimum commission for each trade is 9 GBP.
The applicable commission rate*position value is the commission paid.
In the above example of XYZ PLC, the commission is calculated as below: 1000 units x 1625p x 0.10% = 16.25 GBP.
Holding Cost
If you hold a position after 5:00 p.m. New York time, the holding cost will be charged. If the position is fixed term, the holding cost will be included in the price of product.
We calculate the application holding cost rate based on the interbank interest rate.
For example, UK100 (GBP) is based on the London Interbank Offered Rate (LIBOR). For long position, the holding cost rate is LIBOR+2.5%. For short position, the holding cost is LIBOR-2.5%. If the potential interbank rate is equal or below 2.5%, the holding cost will be charged for short positon.
