Example CFD

As exchange rate is a reflection of the currency value relative to the other currency, you would buy the first one from the pair, if you think it is going to strengthen and sell, if you are of the opposite view.

Suppose the EURUSD is 1.30680-1.30690 and you think the Euro is going to strengthen, so you decide to buy 1 standard contract (equivalent of €100,000) at 1.30690. With every pip up movement, i.e. the fourth decimal point you will win $10. Should the market go the opposite direction, you will lose $10.

Let’s assume, you are right and the market is moving as you predicted, so you decide to take profits when we quote 1.30946-1.30956. As you have to sell in order to close the position, your exit price will be 1.30946 and the difference is 25.6 pips (the exit minus the entry price 1.30946 – 1.30690). That multiplied by the value per pip by the size of your position translates to a profit of $256 that you have made on the rising value of the Pound.

If the market, however, goes the opposite direction, your position may incur losses. Let’s assume for a while that since you bought the Euro versus US Dollar, the exchange rate had fallen and we quote now 1.30513-1.30523. This is where you decide to cut your losses and sell to close at 1.30513. The difference of 17.7 pips multiplied by pip value by the number of contracts amounts to a loss of $117.