Forex trading allows you to speculate on price movements in the global foreign exchange market. Currency values rise and fall in relation to each other and in response to national and international economic, financial and political events.
When trading forex, you would buy a currency pair if you believed that the base currency is going to strengthen against the counter currency. Alternatively, you would sell a currency pair if you believed that the base currency is going to weaken against the counter currency.
With City Index, you can choose to trade FX through spot FX or Knockout Options.
Forex trading example 1: buying AUD/USD
You believe that the US dollar will weaken and the Australian dollar will strengthen following stronger Australian retail sales figures, so you decide to buy (go long) on 10,000 units of AUD/USD at 0.64900.
For every pip the price moves in your favour, you’d make USD $1, and for every pip it moved against you, you’d lose USD $1.
The winning trade
Good news, the retail sales figures showed a boost in spending, causing the Aussie to rise. The pair is now trading at 0.64980/0.64982 and you decide to sell to close at 0.64980.
You bought at 0.64900 and sold at 0.64980, a rise of 8 pips. This gives you a profit of $8 – which is calculated as the open price (0.64900) – the closing price (0.64980) x 1.
Margin and profit & loss are calculated (and denominated) in the second, or counter currency of the pair. City Index then automatically converts trading P&L into your denominated account currency at the prevailing market rate at the time that the trade is closed.
Say that the retail sales figures came in worse-than-expected instead, causing the US dollar to strengthen against the Aussie dollar, sending AUD/USD lower.
You decide to close your trade and cut your losses. You bought at 0.64900 and sold at 0.64850, meaning you’d have lost $5 – which is calculated as the open price (0.64900) – close price (0.64850) x1.
Forex trading example 2: selling EUR/USD
Investors are concerned about the upcoming elections across Europe, and you expect the euro to fall against the US dollar. You decide to sell (go short) €20,000 at 1.0650.
In spot forex trading, the trade size is in units of the first, or base, currency in the pair.
EUR/USD has a margin factor of 3.33%. The margin, as well as the P&L, are calculated in the counter currency of the pair – in this case, US dollars.
The winning trade
The euro drops against the dollar as political event risk increases. To close the trade, you decide to buy €20,000 at 1.0570 to close your trade with a profit of $160 – which is calculated as the open price (1.0650) – close price (1.0570) x stake (20,000).
City Index automatically converts trading P&L into your denominated account currency at the prevailing market rate at the time that the trade is closed.
Supposing a weaker dollar across the board pushes the euro up by 50 pips and you buy to close at 1.0700. You would have lost $100 – which is calculated as the open price (1.0650) – close price (1.0700) x stake(20,000).