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Example of trading with short position

Some examples:

1. Assume that you start with a clean slate and that the current GPB/USD rate is 1.5847/52. You expect the pound to appreciate against the US dollar, so you buy 100000 GBP at the offer price of 1.5852 USD.

The value of the contract is as follows:

100000 X 1.5852 USD = 158,520 USD.

GBP/USD duly appreciates to 1.6000/05. Therefore, you decide to close out your position by selling your sterling for US dollars at the bid rate.

Your gain is as follows:

100,000 X (1.6000 – 1.5852) USD = 1,480 USD

This sum is the equivalent of 10 USD per point. Therefore, you earn 1,480 USD on an exchange rate movement of less than 1%. This illustrates the positive effect of buying on margin.

Had the GBP/USD fallen to 1.5700/75, your loss would have been the following:

100000 X (1.5852 – 1.5700) USD = 1520 USD

The lesson is that margin trading magnifies your rate of profit or loss.

2. Betting on a fall is when you expect sterling to fall from GBP/USD = 1.5847/52, so you decide to sell 100000 GBP/USD.

The value of the contract is as follows:

100000 X 1.5847 USD = 158,470 USD.

You have effectively sold 100,000 GBP and bought 158,470 USD. If your broker requires 1% of 158,470 USD as margin in US dollars, namely 1,584.70 USD in cash GBP/USD falls to 1.5555/60, then you are looking at a paper gain of:

100000 X (1.5847 – 1.5560 USD) = 2,870 USD

Your 2,870 USD paper gain is credited to your margin account where you now have 4,454.70 USD. This enables you to maintain open positions worth 4,454.70 USD.

However, GBP/USD starts to rise. When it reaches 1.6000/05, you are looking at a paper loss of:

100000 X (1.6005 – 1.5847) USD = 1,580 USD.

Your margin account is debited by 1,580 USD; taking it down to 2,874.70 USD

"Open position" is an indebtedness in particular currency, occurring during operations of buying or selling, which is not covered until the open position is closed out and opposite operation in the corresponding currency on the corresponding currency market is carried out. It occurs in the same market where the first position-opening deal was made. If an open position exists, currency changes influence one's account while because of currency fluctuations either profit or loss can happen. The "square" or "flat" position is term for the condition, when no open positions are left. In addition, "long position" is a position occurring when buying the base traded currency; it is a buyer's position. Suppose that it was concluded a as a buy deal GBP 100000 at the rate 1.6200 and, accordingly sell USD 162000, a long position on pound has befallen and correspondingly, short position on USD. If you now conclude a deal for Sell GBP 100000, the position will be closed out. The closing rate determines if there will be profit or loss occurrence.

The position issuing, when the base traded currency is being sold, is called "short position," or "seller's position." Position resulting as the distinction between the amounts of all the long and short positions on the definite traded currency market is called "total open position on the traded market." Buying and selling deals on one and the same traded market with one execution term counterbalance one another.

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