Let’s take the following scenario; after conducting some thorough research, a trader believes that the US Dollar is likely to soon strengthen against the Euro. Consequently, the trader decides to go short on EUR/USD – purchasing Dollars in exchange for Euros. The currency pair is currently trading at bid/ask rate of 1.6764/1.6770. The trader selects the maximum leverage scale of this currency pair, 200:1, and ‘sells’ $10,000 at that rate of 1.6770.
To calculate initial deposit:
Amount of currency to purchase x counter currency exchange rate / leverage scale
That means a payment of $83.85 is required for the initial deposit (10,000 x 1.6770/200). After a short period, the market moves in accordance with the trader’s prediction, and the Dollar strengthens against the Euro.
The bid/ask rate becomes 1.6811/1.6817, and the trader decides to close the position here. The trader ‘buys back’ the €10,000 at a price of 1.6811.
The trader opened at 1.6770 and closed at 1.6811, an increase of 41 percentage points (pips).
To calculate profit:
Profit = (price closed at - price opened at) x amount of currency purchased
So, the trader has earned $41 from this trade [(1.6811-1.6770) x $10,000].
In an alternative scenario, the markets move in the opposite direction to the trader’s position: the Euro strengthens against the Dollar. As a result, the trader decides to ‘buy back’ the €10,000 when the bid/ask rate reaches 1.6720/1.6726.
To calculate a loss:
Profit = (price opened at - price closed at) x amount of currency purchased
In this instance, the trader made a loss of $50 from this trade [(1.6770-1.6720) x $10,000 = $50].