Example of a Foreign Exchange Trade

Forex trading always involves buying one currency and selling another.

In any transaction there is a base currency and an exchanged currency. Market convention determines which will be the base currency for a given transaction.

Say you thought the British Pound (GBP) was likely to strengthen against the US Dollar (USD).

You want to buy 100,000 GBP and are quoted the following price:

GBP/USD at a rate of 1.6500

In this example the British Pound (GBP) is the base currency and USD is the exchanged.

An exchange rate of 1.6500 implies that each 1 GBP can be exchanged for 1.6500 USD.

Therefore buying 100,000 GBP/USD at 1.6500 translates into buying 100,000 GBP in exchange for 165,000 USD.

In our example say the GBP/USD exchange rate moves to 1.6600 the following week.

An exchange rate of 1.6600 implies that each 1 GBP can be exchanged for 1.6600 USD.

If you sell the 100,000 GBP you previously purchased you will now receive 166,000 USD - a profit of $1,000 before dealing costs.