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So, since you believe that
market price for EUR/USD pair will go higher, you will enter a *buy position* in market. For simplicities sake, let's say you bought one lot at 1.3245. As long as you sell back pair at a higher price, then you make money.
But, no worries. This seemingly elaborate process is handled, and even calculated for you, via broker's software mentioned above. The chart software and quote board are in agreement with all sides of currencies.
To illustrate a typical FX SELL trade, consider this scenario involving USD/JPY currency pair:
REMEMBER ~ Selling ("going short") currency pair implies selling first, base currency, and buying second, quote currency. You sell currency pair if you believe base currency (USD) will go down relative to quote currency (JPY), or equivalently, that quote currency (JPY) will go up relative to base currency (USD).
NOTE: while Profit Calculations, on Short-sell trade scenario below, may seem somewhat complicated if you've never been in FOREX market before, trust us when we say, "this process is nearly seamless through your broker trade station (software). We're just showing you this thought- process below so you can SEE how a PROFIT occurs even when SELLING a currency pair.
The current bid/ask price for USD/JPY is 105.26/105.30, meaning you can buy $1 US for 105.30 Japanese YEN or sell $1 US for 105.26 YEN.
Suppose you decide that US Dollar (USD) is overvalued against YEN (JPY). To execute this strategy, you would sell Dollars (simultaneously buying YEN), and then wait for exchange rate to rise.
So you make trade: selling US $100,000 and purchasing 10,526,000 YEN. (Remember, at 1% margin, your initial margin deposit would be $1,000.)
As you expected, USD/JPY falls to 104.26/104.30, meaning you can now buy $1 US for $104.30 Japanese YEN or sell $1 US for 104.26
Since you're short dollars (and are long YEN), you must now buy dollars and sell back YEN to realize any profit.
You buy US $100,000 at current USD/JPY rate of 104.30, and receive 10,430,000 YEN. Since you originally bought (paid for) 10,526,000 YEN, your profit is 96,000 YEN.
To calculate your P&L in terms of US dollars, simply divide 96,000 by current USD/JPY rate of 104.30.
Total profit = US $920.42
Adrian Pablo, FOREX Trader and Freelance Writer.
http://www.1-forex.com
