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Examples – Making Money in Currencies

With the information we have covered so far, let’s do a few examples of how money can be made trading currencies (please note that these are just examples for educational purposes and for you to get familiar with the numbers and the procedure to calculate them).

Example 1: A trader thinks the euro will gain value versus the dollar (EUR/USD is at 1.2150)

Let’s say that the price of the euro-dollar pair is 1.2150 and a day trader, based on his strategy, gets a signal that the euro is going to continue to go up. The trader buys 100,000 EUR (1 lot) at 1.2155 (121,550 USD). If the trader’s margin requirement is 2%, his margin deposit would be 2,000 euros or 2,431 dollars. The trader automatically sets a stop loss of 25 pips based on the interpretation of the technicals on the chart. As the trader expected, the EUR/USD goes up to 1.2225 (on paper, everything works, doesn’t it!). Assuming this meets the profit requirements of his trading system, the trader sells the 100,000 euros. He receives 100,000 x 1.2225 = 122,250 USD. Since the trader originally sold (paid) 121,550 USD for the euros, his profit is 122,250 – 121,550 = 700 USD.

Example 2: A trader thinks the yen will appreciate in value versus the dollar (USD/JPY is at 108.65)

The price of the dollar-yen is dropping and is currently at 108.65. A day trader gets a sell signal based on his strategy. He sells 100,000 USD (1 lot) at 108.60 and receives 10,860,000 Japanese yen. Assuming a 2% margin requirement, the deposit would be 2,000 dollars. Right after placing his trade, the trader places a stop loss of 30 pips based on his methodology. The trader’s decision turns out right and the yen appreciates versus the dollar (dollar loses value relative to the yen), pushing the exchange rate down to 107.50. Satisfied with his profit, the trader sells the 10,860,000 yen at 107.50. He receives, 10,860,000 / 107.50 = 101,023 USD. Since he had originally paid (sold) 100,000 USD for the yen, his profit is 101,023 – 100,000 = 1,023.

Please note that in this example no mention was made of the exact methodology that the trader used to place his trades and set his stop losses. Using a strategy or system in trading is extremely important and it has to be specifically defined, even if it was not discussed in these examples. Also, proper money management (how much should the trader have risked on the trades) was not discussed either. This was done for simplicity’s sake. Generally speaking, a trader should never risk more than a certain amount of his trading capital on any given trade. Read my article about the importance of adhering to a specific strategy.

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