With a CFD you can open a position on rising as well as falling market prices. Please be aware that the following examples and graphics are for illustration purposes only and should not be considered as trading advice.
This example will show you, in detail, how trading CFDs works:
The “actual” market price (EUR/USD) is 1.09715/1.09723. 1.09715 is the so called bid price, which is applied for opening positions on falling prices. 1.09723 is the so called ask price, that will be applied when opening positions on rising prices.
A CFD is always calculated in contract sizes. This contract size illustrates the extent to which an asset is traded. A standard contract, also referred to as a Lot, for the EUR/USD currency pair is equivalent to a volume of $100,000. The next important step is to know the value of a Pip. A Pip is the smallest accountable value of the underlying asset. For the EUR/USD currency pair a Pip has an value of 0.0001.
Profit and Loss
The exact profit or loss is dependent on both the price and the contract size. Whenever you trade a CFD you are dealing with high volumes, which are calculated according to this formula:
Bid/Ask price * Contract size * Number of contracts
You want to open a position on a falling EUR/USD price, which means for you, the bid price is important. With one standard contract, this would mean the following position value: $1.09715 * $100,000 * 1 = $109,715. In order to open any position, you must have a certain balance in your trading account. When opening a position a security deposit will be deducted from your account balance, this is the so-called Margin.
For a EUR/USD position it is calculated with 1% of the position value. This means for the example above, you would need to have a security deposit of $1,097.15, this amount must be available in your trading account.
In case of win
Assuming that the market moves in the way that you anticipated. The EUR/USD price falls to a new level of $1.09153/$1.09161. You opened a position on a falling price, meaning you had to sell the EUR/USD first and buy it back now to close the position. Therefore, for you, the asking price of $1.09161 is important. With a CFD the difference between the positions is used for the payout. Your position for this price has a current value of: $1.09161 * $100,000 * 1 = $109,161
You have opened a position on a falling exchange rate, which means the calculation of your profits is as follows: Entry price – Exit price = Profit = $109,715 – $109,161 = $554
Upon closing this position, $544.00 will be credited to your account. In addition, your initial security deposit (Margin) $1,097.15 will also be made available again.
In case of loss
In this case scenario, the market moves counter to what you predicted. The EUR/USD exchange rate rises to a new level of $1.10248/$1.10256. Again here the asking price is important. The asking price is now $1.10256 giving your position a value of: 1.10256 * $100,000 * 1 = $110,256
Your loss would be calculated using the following formula: Entry price – Exit price = Loss = $109.715 – $110.256 = -$541
You have already set aside a security deposit of $1,097.15 from which your loss on this position will be deducted. The difference of $556.15 will be returned to your account.
Example of placing a Forex Trade:
- You believe that that the British pound will go up against the U.S. dollar.
- You open a BUY GBP/USD 1 standard Forex lot (100,000 units of GBP/USD). When you buy one lot (100,000 units) of GBP/USD at a price of 1.50000, you are buying 100,000 pounds, which is worth US$150,000 (100,000 units of GBP * 1.50000).
- Your predictions come true and you close the position at 1.50500. You earn about $500.
Your Actions GBP USD
You buy 100,000 pounds at the exchange rate of 1.5000 +100,000 -150,000
GBP/USD exchange rates rises to 1.5050 and you close. -100,000 +150,500
You have earned a profit of $500. 0 +500
When you decide to close a position, the deposit that you originally made is returned to you and a calculation of your profits or losses is done.
This profit or loss is then credited to your account.Trade Now