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How is a profit or loss incurred when trading Forex?

Making money trading Forex involves buying lower and selling higher or selling higher and buying back lower. Using leverage means that you are able to deposit a smaller amount of money to achieve the same buying power as you would have if you bought and sold the currencies outright.

In this example, Mary deposits $5,000 into her Forex trading account and nominates the leverage on her account to be 1:100. As a result of leverage, Mary’s buying power on her $5,000 deposit becomes $500,000. Mary decides to buy 0.1 lots of the AUD/USD pair at a price of 0.99802. Three days later, the price of the AUD/USD is 1.04069 and Mary decides to close her position. Mary’s profit is calculated as (1.04069 – 0.99802) 426 pips. As Mary opened a position of 0.1 lots, she made a profit of $426, or $1 per pip.

Of course, should the AUD/USD have moved against Mary below the opening price of her trade to a level of 0.97802, Mary would have incurred a loss on the trade of (0.99802 – 0.95542) 426 pips. As Mary’s position size was 0.1 lots, she would have incurred a loss of $426 or $1 per pip.

It is important to be aware that when trading Forex you can also incur losses which can be greater than your initial deposit.

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