Interested in currency investing? Not sure how this all works? Then read on for a simple forex trading example!
Imagine you opened an account with an online broker and made a $1,000 margin deposit. Your broker offers “matching” so you can trade the standard lot size of 100,000 units on a deposit of 1,000.
You’ve done your research and are fairly confident that the euro will rise in the short term, so you decide to invest 100,000 in the trade.
The market opens and your broker gives you a quote of EUR/USD = EUR 1.4425. You sell $144,250 at this rate to buy EUR 100,000.
A few days later EUR rises to 1.4535 You decide to sell 100,000 EUR at that price and get $145,350. Without considering a margin spread, your profit is $145,350-$144,250 = $1,100.
Now let’s look at a long-term strategy.
Let’s say you believe that the Swiss Franc (CHF) will appreciate against the Japanese Yen (JPY) over the next two months.
However, to minimize risk, you decide to take a smaller position and stake 10,000 yen against the franc. Your broker gives you an offer of CHF/JPY = 98.35
Well, to exit this long range trade, you need to use a strategy called “margin trading” and a tactic called “swapping.”
This is because Forex is a “spot trading” market on a daily basis and the only way to carry a margin position forward for the long term is to do a “swap”. A swap is a method of buying and selling a currency pair on two different dates at the same time.
In this case, swap CHF/JPY at the time of your first trade and advance your position by two months (the amount of time you expect the franc to appreciate against the yen).
So you agree to sell 10,000 JPY for CHF at 98.351 and then swap your position for two months at a forward rate of CHF 98.45 – ie – buy CHF for 984,500.
Within a month the exchange rate has moved up and you need to move your position forward another month by buying back yen at a new rate of 97.40 for 970,400.
If the position is closed at the two-month mark, both trades will be settled. Your JPY account will be debited and credited 10,000 yen at the same time. Your CHF account will be debited with CHF 970,400 and credited with CHF 984,500 – for a profit of CHF 14,100.
Convert this back to JPY for a profit of 1,373,340 yen.
buying on margin example
