How can I Profit from Trading?

The decision on whether to buy or sell a currency, in what amount, at what rate and so on, will be further discussed in later on. For now, let’s concentrate on the technical side of trading and profit/loss calculation.

As explained above, one can either buy or sell any currency against another currency that is offered by the broker for trade. The trade is always performed in an amount of the major currency. The decision now is whether to buy or sell the major currency and against which currency should you transact the trade.

Let’s assume that a trader strongly believes that the Euro is going to strengthen against the USD and thus wishes to trade in 100,000, similarly to the example above.

As discussed above, the trader will Buy 100,000 EUR against the USD at the larger number (the Ask), a price of 1.3431.

As calculated previously, this would mean that the client bought 100,000 EUR and sold (100,000*1.3431=) 134,310 USD.

The client's balance sheet would look as follows:

Balance in Euro's	Balance in US Dollars
+100,000	-134,310

Since the client bought the EUR, he is hoping that the price of the EUR relative to the USD will rise (or strengthen) until he will be able to sell the EUR back to the broker and make a profit. Since the client bought the Euro against the US Dollar at a price of 1.3431, and that we know that when it comes time to sell the EUR he will have to do so at the Bid price (the smaller number), then the market must move in his favor by at list one point or pip above his purchase price (see discussions on pips and spreads below). 

For example, let's assume that the market has moved by 0.2 percent in favor of the client.

(0.2/100*1.3431=) 27 points or pips; the price quoted by the broker for EUR/USD will now look like this:

Instrument	Bid	Ask
EUR/USD	1.3455	1.3458

As we can see, both the Bid and the Ask price have moved up by 0.0027 or 27 points or pips. As discussed earlier, in order to close the initial trade the client must now sell the 100,000 EUR against the USD at the Bid price of 1.3455.

As calculated previously, this would mean that the client sold 100,000 EUR and bought (100,000*1.3455=) 134,550 USD. The client's balance sheet will now look like this:

Balance in Euro's	Balance in US Dollars
+100,000	-134,310	(Bought EUR/USD at 1.3431)
-100,000	+134,550	(Sold EUR/USD at 1.3455)
0	+240

As we can see, the client has made a profit of 240 US Dollars. His balance in Euro's is zero. Since the client bought 100,000 EUR and then sold 100,000 EUR his balance in EUR will always be zero, no matter if he made a profit or loss in the transaction. The profit or loss will always appear in the secondary currency (in this case the USD).

This example shows us that since all trades are performed in monetary amounts in the major currency, the balance at the end of closing the trade in the major currency will always be zero, however the balance in the secondary currency will show the profit or loss. At 4XP in order to make the calculation seamless we immediately exchange all profits and losses into USD, so as to make the calculation as easy as possible for the trader. However, it is important that every trader knows exactly how profits and losses are calculated.