Forex trading involves risk. Losses can exceed deposits

See how to buy and sell currency pairs with our illustrated examples from IG Academy.

Forex trading involves risk. Losses can exceed deposits

All forex trading works in a fundamentally similar way – you take advantage of the movement of one currency against another in a pair, earning a profit if you predict the pair’s movement correctly and incurring a loss if you don’t.

EUR/USD is trading at 1.1284, with a buy price of 1.1285 and a sell price of 1.1283, giving it a spread of 2 pips. You think that the euro is set to gain value against the dollar, so you decide to buy the market at 1.1285.

The size of the position is measured in lots, with each lot equal to 100,000 of the first currency (the base currency) in the pair. In this case, buying a single lot of EUR/USD is the equivalent of trading €100,000 for \$112,850. You decide to buy three, giving you a total position size of \$338,550. This means you’ll earn \$30 for every point of movement.

Forex trading is a leveraged product, so you don’t have pay the full value of your position upfront. EUR/USD has a margin factor of 1%, so you only have to commit \$3385.50 – or €3000 – as margin.

### If your prediction is correct

The dollar rises against the euro, and EUR/USD is now trading at 1.1309, with a buy price of 1.1310 and a sell price of 1.1308. You reverse your trade to close your position, so you sell three contracts at 1.1308.

Your €300,000 is now worth €339,240, because 1.1308 x (100,000 lot size x 3) = €339,240. €339,240 – €338,550 = €690, which is your profit from the trade. You could also calculate this as 11308 – 11285 = 23, which you multiply by €30 per point to get €690.

You will incur funding charges if you kept your position open overnight, which is an industry standard, and you’ll also have to pay applicable capital gains tax.

### If your prediction is wrong

The pound falls against the euro, and EUR/USD is trading at 1.1259, with a sell price of 1.1258.

1.1258 x (100,000 lot size x 3 CFDs) = 337,740, which means your three contracts are now worth €337,740, €810 less than when you opened your position. Another way to calculate this is to subtract 11258 from 11285, which gives you a loss of 27 pips. 27 x 30 euros per pip = €810.

As this is a not profitable trade, you don’t have to pay capital gains tax and you can offset a loss against future profits for CGT purposes.* You will have paid funding charges if you held the position overnight, however.

 Underlying price 1.1284 Sell / buy price 1.1283 / 1.1285 Trade Buy at 1.1285 Trade size Three contracts Initial outlay €3385.50 Capital gains tax Payable on profits Commission None – our only charge is the bid-offer spread. Other potential charges A funding charge if you keep your position open overnight. Market movement Rises 25 pips to 1.1309 Falls 25 pips to 1.1259 Closing price Sell at 1.1308 Sell at 1.1258 Calculation 1.1285 x (3 x €100,000) = €338,550 1.1308 x (3 x €100,000) = €339,240 339,240 – 338,550 = €690 1.1285 x (3 x €100,000) = €338,550 1.1258 x (3 x €100,000) = €337,740 337,740 – 338,550 = -€810 Profit / loss €690 profit €810 loss

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