Forex trading works by taking a position on the exchange rate between two currencies. Buy EUR/USD and you benefit if the euro rises against the US dollar; sell it and you benefit if the euro falls. Your result depends on how far the rate moves, your position size and the costs of opening, holding and closing the trade.
This guide follows a retail forex trade from the price quote to the account statement. All prices, position sizes and fees in the examples are hypothetical, not live quotes or trading recommendations.
What You Actually Trade
In retail over the counter forex, you enter a transaction with a dealer rather than buying through a central currency exchange. The dealer is your counterparty: when you buy, it sells, and when you sell, it buys. Your ability to close the position depends on the prices and trading terms it offers. These counterparty and platform risks are covered in the CFTC advisory on retail forex trading.
A speculative margin account is not the same as converting dollars into euros for a trip. You deposit collateral to support a currency position rather than paying its full face value into a spendable foreign currency balance. The account records the position’s changing profit or loss.
This article focuses on those retail dealer transactions. Currency futures use a different contract and clearing structure, so the calculations and account mechanics below should not be applied to every currency product without checking its terms.
Reading a Forex Quote and Choosing a Direction
A currency pair expresses the value of one currency in another. In EUR/USD, EUR is the base currency and USD is the quote currency. A rate of 1.1000 means one euro is worth 1.10 US dollars.
Buying the pair, also called going long, creates exposure to a stronger euro relative to the dollar. Selling the pair, or going short, creates exposure to a weaker euro relative to the dollar.
The relationship matters more than either currency in isolation. A view that “the dollar will rise” is incomplete until you identify the other currency and the pair’s quotation order. Buying USD/JPY expresses a different direction from buying EUR/USD. The guide to forex currency pairs and quotation conventions covers those distinctions.
Why There Are Two Prices
A trading platform normally displays a bid and an ask. Suppose EUR/USD is quoted at 1.1000 / 1.1002.
The bid, 1.1000, is the price at which you can sell the base currency. The ask, 1.1002, is the price at which you can buy it. Their difference is the spread: 0.0002, or two pips for this pair.
To open a long position, you buy at the ask. To close it, you sell at the bid. A short position does the reverse: sell at the bid, then buy back at the ask.
If you buy and immediately close while both prices remain unchanged, you lose the spread before any separate charges. The market does not have to move against you for a new position to show a small loss.
A Forex Trade From Opening to Closing
Suppose you buy 10,000 euros against the dollar at an executed ask price of 1.1002. The dollar value of that position at entry is:
10,000 × 1.1002 = $11,002
That is the position’s face value, not necessarily the cash required to open it. Margin determines the collateral requirement, which we will calculate below.
To close the entire position, you sell the same 10,000 euros. For this long trade, the price result in dollars is:
(Closing bid − opening ask) × euros traded
| Closing bid | Calculation | Result before separate charges |
|---|---|---|
| 1.1050 | (1.1050 − 1.1002) × 10,000 | $48 profit |
| 1.0950 | (1.0950 − 1.1002) × 10,000 | $52 loss |
| 1.1000 | (1.1000 − 1.1002) × 10,000 | $2 loss |
These calculations already include the spread through the executed buying and selling prices. Do not subtract it again. Commissions and any financing charges still need to be accounted for separately.
For a short position, reverse the subtraction: opening bid minus closing ask. Selling 10,000 euros at 1.1000 and buying them back at 1.0952 produces a $48 profit before separate charges.
How Position Size Changes the Result
For EUR/USD, one pip is 0.0001. On a 10,000 euro position, each pip is worth $1. The same movement on a 100,000 euro position is worth $10 per pip. Ten times the exposure means ten times the price profit or loss, not ten times the forecasting skill.
Platforms may express trade size in currency units or lots. Under the usual convention, 100,000 base currency units equal one standard lot, making this example 0.1 lot. Check the contract settings rather than assuming every order ticket uses the same format. The guide to pips, lot sizes and position values covers the calculations across different pairs.
The result above is in dollars because USD is the quote currency. If your account uses another currency, converting the result adds another calculation.
Margin, Leverage and Your Account Balance
Margin is collateral reserved to support an open position. It is not a trading fee, and it is not your maximum possible loss.
For US accounts with an NFA Forex Dealer Member, the baseline minimum security deposit is 2% for transactions in the currencies listed in the rule and 5% for other transactions. Requirements can be higher. The applicable categories and provisions appear in NFA Financial Requirements Section 12.
Assume the example trade requires 2% margin. Its opening collateral requirement would be:
$11,002 × 2% = $220.04
You are supporting $11,002 of currency exposure with $220.04 of required margin. That corresponds to a 50:1 position value to margin ratio. It does not mean a $1,000 account holding only this trade is using 50:1 exposure relative to its equity; that ratio would be about 11:1 at entry.
Balance Is Not the Same as Equity
Your account balance reflects deposits, withdrawals, realized trading results and posted charges. Equity adds the current profit or loss on open positions.
If your balance is $1,000 and the open trade shows a $52 loss, your equity is $948 before any other adjustments. The loss affects your available resources even though you have not closed the position.
Free margin is broadly the equity remaining after margin commitments. If losses leave insufficient collateral, the dealer may close positions under its margin rules. Do not assume you will receive a phone call and time to decide what to do.
A $220.04 margin requirement therefore does not cap this trade’s loss at $220.04. Losses can consume other account funds and, depending on the applicable protections and agreement, exceed the deposit. The separate guide to forex leverage, margin and forced liquidation explains these account mechanics in more detail.
How Orders Become Executed Trades
An order is an instruction. An executed trade is the resulting position. The distinction matters because clicking a button does not guarantee execution at the price you last saw.
A market order requests execution at the available price. It prioritizes getting the trade done rather than setting a firm price boundary.
A limit order sets the worst price you will accept: a buy limit specifies that price or lower, while a sell limit specifies that price or higher. It may remain unfilled.
A stop order becomes active when its trigger condition is met. An ordinary stop loss commonly triggers a market order intended to close the position, but the eventual fill may differ from the stop price.
That difference is slippage. Prices can change between submitting an instruction and the dealer receiving or executing it. Slippage can be favorable or unfavorable; the handling of changing prices and requotes is addressed in NFA guidance on forex order execution.
Suppose the example long position has a stop at 1.0972. An exact fill there would produce a $30 price loss. If the actual fill is 1.0967, the loss becomes $35. The stop instruction did not turn $30 into a guaranteed ceiling.
Before placing an order check which price triggers it: bid, ask or another stated reference. After requesting an exit, confirm the filled quantity and remaining position rather than assuming the entire trade has closed.
What Changes the Net Result
The price calculation is not always the final account result. Separate commissions and financing charges can reduce a winning trade or increase a losing one. A correct directional forecast can still produce a net loss if the price gain does not cover transaction costs. These cost risks feature in the SEC investor bulletin on foreign currency trading.
Suppose the $48 winning example incurs $1.40 in total opening and closing commissions and a $0.60 holding charge. Its net result becomes:
$48 − $1.40 − $0.60 = $46
Those charges are illustrative. Check whether commission is quoted per side or for the complete trade, and whether it scales with position size.
A position held through the dealer’s rollover cutoff may receive a financing debit or credit. Do not assume buying the currency with the higher interest rate guarantees a credit; the dealer’s calculation and markups matter. Nor does “commission free” mean cost free.
Before comparing account pricing, separate the spread, commission and holding cost. The guide to forex broker spreads, commissions and swap charges explains how those charges interact.
Why Exchange Rates Move
For floating currencies, prices respond to supply and demand. Trade payments, investment flows and speculation all create reasons to exchange one currency for another.
Relative interest rates also influence demand for assets denominated in different currencies. Higher returns may attract investment, but perceived risk and other forces can offset that effect. The relationship between rates, capital flows and currency demand is set out in the Reserve Bank of Australia’s analysis of exchange rate drivers.
For a trader, the practical distinction is between explaining a movement and knowing what happens next. A plausible economic argument does not supply an entry price, a position size or an exit plan.
You can believe a currency will strengthen over several months and still lose on a trade closed after an adverse move tomorrow. The trading contract measures the price change during your actual holding period, not whether your broader argument eventually proves correct.
Before Sending an Order
Use the order ticket to translate a market view into amounts you can verify. Before confirming, be able to answer four questions:
- Which currency am I buying, and which am I selling?
- How many base currency units does the order represent?
- What would the intended entry and exit prices mean in account currency?
- How much equity remains available after margin and expected charges?
Choose the position size around a defined loss budget rather than the largest trade the platform permits. The guide to forex risk management and position sizing connects trade size, stop distance and account exposure.
The platform can calculate margin and display profit or loss. It cannot decide whether the exposure is affordable. Being able to reproduce the trade’s arithmetic before opening it is a basic check, not evidence that the trade will be profitable.