In Forex market investors make profit on currency rate fluctuations. The stronger the rate (quotation) changes the bigger your profit or loss is.
It is important to understand that a decreasing rate may be just as beneficial as the rising one in the Forex market.
- When the rate is increasing, you are buying the base currency for the quoted one, so that to sell it later at a higher price (trading volume is always expressed in the quoted currency).
- When the rate is decreasing, you are selling the base currency for the quoted one, so that to buy it later at a lower price (trading volume is always expressed in the quoted currency).
Such actions constitute a complete trading operation in which you first open a buy or sell position to close it at a new price later by performing a reverse deal.
Let us say the currency pair EURUSD had been falling and then started an upward correction at 1.1225. You suppose the correction will be short – lived and decide to open a sell position when the downward movement resumes. The pair starts falling after reaching 1.1286. You set a Sell Stop order at 1.1284 to sell 10 000 euros. When the price reaches that level, a short position is opened. You decide to set Take Profit order at 1.1145. When the Ask price reaches that level, Take Profit order triggers a reverse operation. You buy €10 000 at 1.1145 and take 139 points (1.1284-1.1145=0.0139). With the given volume of €10 000 (0.1 lots), the cost of 1 point equals $1. Thus, you make a profit of $139.
Get more information: Currency Trading Conditions | Currency Abbreviations.