Let’s look at an example of going long, using EUR/USD as our currency pair;
Consider the following scenario; there is a considerable amount of market tension concerning upcoming US GDP figures, as well worry that an upcoming election will see gains for a party traditionally hostile to big business.
As a result, you decide that the Euro looks likely to strengthen against the dollar and so you go long on EUR/USD, which is currently trading at bid/ask rate of 1.6764/1.6770. You decide that you’re going to take full advantage of the leverage opportunities available to you; you ‘buy’ €10,000 at that rate of 1.6770, at a leverage scale of 200:1.
The following equation determines how much your initial deposit needs to be;
(Amount I want to buy times counter currency exchange rate/leverage scale)
So, (10,000 times 1.6770/200), which equals €83.85. This is the amount required in the initial deposit. Let’s say events play out as you expected, with the result being that the Euro does strengthen against the dollar. The bid/ask rate is now 1.6811/1.6817 and you decide to close out the trade at this point, ‘selling’ your €10,000 at a price of 1.6811
Having bought at 1.6770, I sold at 1.6811, which is a rise of 41 percentage points.
(Level I sold at – Level I bought at) times Amount I bought
So, (1.6811-1.6770) times 10,000 = $41
However, let’s say the markets went the other way to my trade and the dollar strengthened against the Euro. When the bid/ask rate hits 1.6720/1.6726 I decide to cut my losses and sell all €10,000. My losses would be worked out as follows;
(Level I bought at - Level I sold at) times Amount I bought
So, (1.6770-1.6720) times 10,000 = $50