Example SB

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

Suppose the GBPUSD is 1.57137-1.57157 and you think the Pound is going to strengthen. You decide to buy £5 a point at 1.57157. With every pip up movement, i.e. the fourth decimal point you will make £5. Should the market go the opposite direction, you will lose £5.

Let’s assume, you are right and the market is moving as you predicted, so you decide to take profits when we quote 1.57943-1.57963. As you have to sell in order to close the position, your exit price will be 1.57943 and the difference is 78.6 pips (the exit minus the entry price 1.57943 – 1.57157). That multiplied by your stake amounts to a profit of £393 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 that since you bought the Pound versus US Dollar, the exchange rate had fallen and we now quote 1.56924-1.56944. This is where you decide to cut your losses and sell to close at 1.56924. The difference of 23.3 pips multiplied by your stake is your loss of £116.5.