Ways to Make Profit in the Forex Market

Beginner Questions
22

Example:

The investor follows the cross rate between the Euro and the Japanese yen. He believes that this market is headed for a fall. As he is less confident of this trade, he does not fully use the leverage available on his deposit. He chooses to ask the dealer for a quote in EUR1,000,000. This requires a margin of EUR1,000,000 x 5% = EUR50,000 = approx. USD52,500 (EUR/USD1.05).

The dealer quotes 112.05-10. The investor sells EUR at 112.05.

Day 1: Sell EUR1,000,000 vs JPY 112.05 = Buy JPY112,050,000.

He protects his position with a stop-loss order to buy back the euro at 112.60. Two days later, this stop is triggered as the euro strengthens short term in spite of the investor’s expectations.

Day 3: Buy EUR1,000,000 vs JPY 112.60 = Sell JPY112,600,000.

The EUR side involves a credit and a debit of EUR1,000,000. Therefore, the EUR account shows no change. The JPY account is credited JPY112.05m and debited JPY112.6m for a loss of JPY0.55m. 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 JPY0.55m = approx.USD5,300 (USD/JPY 105) = 5.3% loss on the original deposit of USD100,000.

23

Example:

An investor has a margin deposit with Global Trading of USD100,000.

The investor expects the US dollar to rise against the Swiss franc and therefore decides to buy USD2,000,000 - his maximum possible exposure.

Global Trade Station quotes 1.5515-20. The investor buys USD at 1.5520.

Day 1: Buy USD2,000,000 vs CHF 1.5520 = Sell CHF3,104,000.

Four days later, the dollar has actually risen to CHF1.5745 and the investor decides to take his profit.

Upon his request, Global Trade Station quotes 1.5745-50. The investor sells at 1.5745.

Day 5: Sell USD2,000,000 vs CHF 1.5745 = Buy CHF3,149,000.

As the dollar side of the transaction involves a credit and a debit of USD2,000,000, the investor’s USD account will show no change. The CHF account will show a debit of CHF3,104,000 and a credit of CHF3,149,000. 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 CHF45,000 = approx. USD28,600 = 28.6% profit on the deposit of USD100,000.

24

We all don’t want to lose money especially if we loose it for nothing.

good example by the way, I also calculate and its exactly correct.
is it more advisable to buy in USD?

25

USD is the most liquidity currency in the Forex Market, myself I like to trade GBP/USD mostly.

26

For example if the USDJPY rate is 82.35, What is the Pip value of the USDJPY cross rate today?
Pip value (in USD terms) = 1 pip / Cross Rate x LOT Size or in this case .01 / 82.35 x 100000 = $12.14 So a one pip favorable movement in the cross rate results in approximately $12 profit per lot held. If trading a mini LOT (10,000 units) the Pip value is 1/10 the value of the Standard LOT Pip value of $12.14, ie. $1.21. If I was holding 20 LOTs of USDJPY and gained 5 Pips my profit would be approximately 5 x 20 x $12.14 = $1214.