Hi.

"A trader with a $10,000 account balance decides that the US Dollar (USD) is undervalued against the Euro (EUR). The current bid/ask price for EUR/USD is 1.2348/1.2350 – meaning a trader can buy 1 EUR for $1.2350 USD or sell 1 EUR for $1.2348 USD. The trader decides to sell EUR (buy dollars) by selling 1 standard lot. With leverage at 100:1 or 1%, initial margin deposit for this trade is $1,000, leaving the account balance at $9,000. As anticipated, the EUR/USD drops 48 pips to 1.2298/1.2300. To exit the position the trader would close 1 lot at 1.2300 In this scenario the trader has realized a profit of 48 pips or $480 US Dollars."

This is a Forex education from ForexMeta.com.
I have questions. Please point me where I am right or wrong on each item.
1. USD is undervalued means exchange rate currently is high and so exchange rate will go down soon. "Anticipated" means exchange rate will go down and it means from 1.2348/1.2350 to lower number/lower number(such as 1.2300/1.2345 here in this example 1.2298/1.2300)
2. It says 48 pips difference but 50 pips and I think it is a calculation mistake.
3. Why does the trader decied to sell EUR?
4. Sell Euro at 1.2348?
5. After EURUSD drops to 1.2298/1.2300(Does this mean exchange rate go down?) the trader sell Euro or buy Euro?
6. First sell Euro then buy Euro? Sell Euro at 1.2348 and buy Euro at 1.2300?
7. Where did 48 pips come from?
8. 1 pip is a $10. Where does it come from?

Please explain as much as you know. I appreciate it in advance.

in a pair the first currency is the base currency and the second currenecy is compared to the first.

So if the usd is undervalued that means if the usd goes up the pair will go down because the eur is the base of the pair and it is compared to the usd.

the spread is the number of pips the broker makes when you trade. When you sell the price is marked up by two pips on the eur usd. so you start to pips in the hole.

If you buy eur/usd then your price would be two pips below the market price.

Then the price has to move two pips in your favor before you break even. anything past that is profit for you. the first two pips are the comission to the broker to conduct the trade.

That is why in this example the trader only made 48 pips. the broker took two of them for conducting the trade for the trader.


Your not actually buying or selling anything. You are trading. You trade eur for dollars and if the dollar goes up in value you trade them back to euros. Now that the dollar is worth more you get more euros back when you trade back.

If the eur was undervalued you would buy euros and wait for them to go up in value then trade them back for dollars. You would get more dollars back. this is how we make profit in forex.

a pip is 1/100 of a penny. if you trade one mini lot that is ten thousand dollars each time the pip went up or down it change the value of you profit by $10000X.0001(1/100of a penny)=$10


I reccommend going to babypips.com/school to get a complete starter course in forex before you even think of trading.

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Hi,

Thanks for sharing your posts guys! I feel the opportunity to profit basically comes from the unpredictability of the rising and falling nature of prices in the Forex markets.

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Hi,

Thanks for the information.
While Forex trading can seem complex it is really not too difficult to understand especially when you have a strong support system in place to assist you. In fact that is the single most important thing that can help you get started and be successful in this business.

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Yes I agreed that babypips school is the best place to start learning forex trading.

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