Assume that the GBP/USD pair is trading at 1.22485, with a buy price of 1.22490 and a sell price of 1.22480. The difference between the buy and the sell price is called the spread. Because you believe that that the pound is set to appreciate against the dollar, you buy a standard GBP/USD contract at 1.22490.
Here, buying a single standard GBP/USD CFD is the equivalent of trading £100,000 for $122,490. You decide to buy three CFDs, giving you a total position size of $367,470 (£300,000). However, because you’re trading the forex pair using leverage, your margin will be 3.33%, which is $12,236.75 (£9990). You could add a stop to your position to manage your exposure to risk.
Your prediction was right and the pound rose to 1.24100 against the US dollar. You can now reverse your trade to close your position by selling three contracts at the new ‘sell’ price of 1.24095. Your profit from this would be $4815 ($372,285 - $367,470).
1.24095 (USD sell price) x 3 (contracts) x 100,000 (lot size) – 1.22490 (USD original buy price) x 3 (contracts) x 100,000 (lot size) = $4815
If your prediction was wrong and the pound fell to 1.21490 against the US dollar (sell price of 1.21485), you’d still reverse the trade to close it, but you’d make a loss of $3015 ($364,455 - $367,470). This is because the new contract value would be lower than the initial value.
1.21485 (USD sell price) x 3 (contracts) x 100,000 (lot size) – 1.22490 (USD original buy price) x 3 (contracts) x 100,000 (lot size) = -$3015
In either case, there would be no commission to pay but you’d have to pay a funding charge to keep your position open overnight.
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