Posted by forex at 6:54 AM
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1. Identify how much the trader pays for the currency. Essentially, currency traders can buy the currency or sell ('short' it). However, because short selling of one currency is the buying of another currency (if you sell the euro vs. the U.S. dollar -- EUR/USD -- you are short-selling the euro or buying the U.S. dollar), we will assume that traders always buy some currency.To know how much a trader paid for the currency, multiply the amount of the currency she bought (typically measured in 100,000 units of some currency) by the exchange rate. For example if you bought 1 million euros with U.S, dollars, the exchange rating being $1.25 to the euro, then the trader paid $1.25 million.Currency trading is typically leveraged (traders borrow money to magnify returns). For example a leverage of 1:100 means that the trader actually bets only $1.25 million / 100 = $12,500.
2. Identify how much the trader sells her currency for. Multiply the exchange rate by the size of her position. In our example, if the exchange rate of EUR/USD climbed from $1.25 to $1.30, and the position was 1 million euros, then the trader sold her currency for 1.3 million euros.
3. Calculate the difference between the price she paid for the currency and the price she got when selling it. Subtract the amount of money the trader paid for the currency from the amount of money she sold it for. In our example, 1.3 million euros - 1.25 million euros = 50,000 euros. The trader has made 50,000 euros or, if the exchange rate of EUR/USD is 1.3, 50,000 x 1.3 = $65,000.