Forex trading examples
Example
1 :
An investor has a margin deposit with Saxo Bank of USD 100,000.
The investor expects the US dollar to rise against the Swiss franc and
therefore decides to buy USD 2,000,000 - 2% of his maximum possible
exposure at a 1% margin Forex gearing.
The Saxo Bank dealer quotes him 1.5515-20. The investor buys USD at
1.5520.
Day 1: Buy USD 2,000,000 vs CHF 1.5520 = Sell CHF 3,104,000.
Four days later, the dollar has actually risen to CHF 1.5745 and the
investor decides to take his profit.
Upon his request, the Saxo Bank dealer quotes him 1.5745-50. The
investor sells at 1.5745.
Day 5: Sell USD 2,000,000 vs CHF 1.5745 = Buy CHF 3,149,000.
As the dollar side of the transaction involves a credit and a debit of
USD 2,000,000, the investor's USD account will show no change. The CHF
account will show a debit of CHF 3,104,000 and a credit of CHF
3,149,000. Due to the simplicity of the example and the short time
horizon of the trade, we have disregarded the interest rate swap that
would marginally alter the profit calculation.
This results in a profit of CHF 45,000 = approx. USD 28,600 = 28.6%
profit on the deposit of USD 100,000.
Example 2 :
The investor follows the cross rate between the EUR o and the Japanese
yen. He believes that this market is headed for a fall. As he is not
quite confident of this trade, he uses less of the leverage available
on his deposit. He chooses to ask the dealer for a quote in EUR
1,000,000. This requires a margin of EUR 1,000,000 x 5% = EUR 10,000 =
approx. USD 52,500 (EUR /USD 1.05).
The dealer quotes 112.05-10. The investor sells EUR at 112.05.
Day 1: Sell EUR 1,000,000 vs JPY 112.05 = Buy JPY 112,050,000.
He protects his position with a stop-loss order to buy back the EUR o
at 112.60. Two days later, this stop is triggered as the EUR o
strengthens short term in spite of the investor's expectations.
Day 3: Buy EUR 1,000,000 vs JPY 112.60 = Sell JPY 112,600,000.
The EUR side involves a credit and a debit of EUR 1,000,000. Therefore,
the EUR account shows no change. The JPY account is credited JPY
112.05m and debited JPY 112.6m for a loss of JPY 0.55m. Due to the
simplicity of the example and the short time horizon of the trade, we
have disregarded the interest rate swap that would marginally alter the
loss calculation.
This results in a loss of JPY 0.55m = approx.USD 5,300 (USD/JPY 105) =
5.3% loss on the original deposit of USD 100,000.
Example 3
The investor believes the Canadian dollar will strengthen against the
US dollar. It is a long term view, so he takes a small position to
allow for wider swings in the rate:
He asks Saxo Bank for a quote in USD 1,000,000 against the Canadian
dollar. The dealer quotes 1.5390-95 and the investors sells USD at
1.5390. Selling USD is the equivalent of buying the Canadian dollar.
Day 1: Sell USD 1,000,000 vs CAD 1.5390. He swaps the position out for
two months receiving a forward rate of CAD 1.5357 = Buy CAD 1,535,700
for Day 61 due to the interest rate differential.
After a month, the desired move has occurred. The investor buys back
the US dollars at 1.4880. He has to swap the position forward for a
month to match the original sale. The forward rate is agreed at 1.4865.
Day 31: Buy USD 1,000,000 vs CAD 1.4865 = Sell CAD 1,486,500 for Day
61.
Day 61: The two trades are settled and the trades go off the books. The
profit secured on Day 31 can be used for margin purposes before Day 61.
The USD account receives a credit and debit of USD 1,000,000 and shows
no change on the account. The CAD account is credited CAD 1,535,700 and
debited CAD 1,486,500 for a profit of CAD 49,200 = approx. USD 33,100 =
profit of 33.1% on the original deposit of USD 100,000.
Choosing The Right Forex Broker
The first and most important step you
will take as a Forex trader is choosing a broker. Forex brokers come in
all different styles, types and qualities. Some are very user friendly,
with easy to use platforms, instant, hassle free execution and
excellent customer service, while others will take your initial in the
blink of an eye. It’s so important to choose the right broker
because you want to be able to focus on trading and let the broker
handle the all the other aspects of Forex.
These 5 things to look for will help you
find the best Forex broker, the one that’s right for you.
1.) Minimum Deposits
As an expert trader, the first thing I look
for in a broker is always the minimum deposit. Those offering mini
accounts, with a minimum deposit of $25, are generally great for more
inexperience, possibly new traders. Those which offer higher minimum
deposits are generally geared from more professional, experienced
traders who are ready to risk more money trading currencies. While this
isn’t an indication of whether or not it’s a
quality broker, it surely tells you the type you’re dealing
with.
As a newer trader, a mini account with a
small initial deposit is a great choice. If you’re an expert
trader, choosing a broker with an advanced platform geared towards
experienced traders may be the best option.
2.) Customer Reviews
Independent reviews and
testimony’s are very important because they show you the
types of experiences real people have had with a specific brokerage.
When looking for reviews, remember that people are more likely to post
if their experience has been negative and reviews on a
broker’s own website will always be positive, so I
wouldn’t even take those into account as they are usually
biased.
3.) 24/7 Customer Service
Customer care is extremely important to me!
If you’re having trouble with execution, using the platform
or making deposits & withdrawals, it really helps to have
understanding, knowledgeable & caring customer service agents
on your site 24 hours a day. Talking to a real person about a question
or problem is so much easier and more convenient than reading an FAQ
page. You deserve a broker with 24/7 service, after all, it’s
your money!
4.) Other Services Offered
Check for market news feeds, commodity
trading or other currency pairs besides the majors that are offered by
all brokers. These types of services may not seem like a big deal now,
but once you’re making money and gaining experience, you may
be interested in them later.
It’s also important to note that a
broker which offers more services generally has more financial backup,
meaning the chances of it going under with your money are very small.
5.) Trying A Demo Account
Always trade on a demo account before
choosing a broker. A demo will let you try the platform, test the
execution, customer service and news feeds which are all vital parts of
your trading experience. Demo account should be free and you can try as
many as you like before actually making a deposit
