Mechanics of a Forex Trade

For those who are thinking about entering the forex market for the first time, there is some very basic information that is often overlooked. For example, what exactly is happening when you enter a trade? Well it’s simple really, but important to understand. Say, for example, that you have a shiny new $10,000 account. You find a great entry on EUR/USD that you want to take. You enter a 1 mini lot long position with a 100 pip stop loss and a 200 pip take profit target at a price of 1.2500. What just happened? In the meantime, what you have done so far is you borrowed USD12,500 and traded it in for EUR10,000. Now EUR/USD moves in your favor and hits your take profit order at 1.2700. What that order does is sell the EUR10,000 that you are holding and buys USD at the current rate, meaning you get USD12,700 because the rate is now 1.2700. Now you pay your original loan back to your broker, which was USD12,500 and congratulations! You have just pocketed $200 on your first trade. Please note that in the above example we did not consider any spread or other transactions costs – it is assumed that the entry price of 1.2500 was the ask price, and the exit price of 1.2700 was the bid price.