Example of a short position
The EUR / USD rate is 1.4291 BID - ASK 1.4293.
This means that a trader can buy at 1.4293 and 1.4291 can sell to. The spread or difference between the BID and ASK is 0.0002 or 2 pips.
For 1 EUR gets now a 1.4291 USD. The investor believes in the strengthening of USD versus the EUR. According to this investor gets so later for the same EUR USD less. The parity, currently 1.4291, thus the investor would therefore decline.
The investor takes a position. He sells 1 lot of EUR 100,000.
What will actually happen?
He sells 100,000 EUR and buys 100,000 x 1.4291 = 142.910 USD. On his account, he therefore a position of 142.910 USD and a debt of EUR 100,000. To the ratio 1.4291 eliminate these two positions are on.
How much margin is needed?
For this position a value of 100,000 EUR to take is 1% or 1,000 EUR account required.
The price rises ...
The investor has the right to the end. The parity decreases from 1.4291 to 1.4213. The investor decides to take his profit and to close the position.
He purchases now in the position. The sale price is the ASK: 1.4213.
He now buys from 100.000 EUR 100,000 x 1.4213 = 142.130 USD. 100.000 EUR joins us on his account and 142.130 USD goes off.
The investor had to take:
- 100,000 + EUR & 142.910 USD.
The result is thus:
- 100.000 EUR + 100,000 USD = 0 EUR
+ 142.910 USD - 142 130 = 780 USD
The investor thus realized a profit of 780 USD with a bet of 1,000 USD.
The value of the pip
A pip is the smallest possible fluctuation of parity. In the case of the EUR / USD is 1/10.000. On a bet of 100,000 is this so 10 USD. The value of a pip is always in the 2nd currency parity.
In the example above parity decreased by 78 pips. The large short position was 100,000. The profit is 780 USD.
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