Assume that the GBP/USD is trading at 1.32585 with a buy price of 1.3259 and a sell price of 1.3258. You believe that GBP will strengthen, so you decide to buy five contracts at 1.3259. Currencies are traded in lots, where one GBP/USD lot (contract) is the equivalent of trading £100,000 for $132,590. This means your position size will be £500,000 ($662,950) – because you are buying five contracts. However, the margin is 3.33% so you’ll need to put up £16,650 to start trading.
If GBP/USD rises to 1.33185 with a buy price of 1.3319 and a sell price of 1.3318 and you decide to close your position, you’ll make a profit. So, you reverse your trade to close your position, selling five contracts at 1.3318. Your £500,000 is now worth $665,900 [new sell price of 1.3318 x (100,000 x five CFDs)]. Your profit is £3911.41 [($665,900 - $662,950) x your buy price of 1.3259].
If GBP/USD falls to 1.31885 instead, you might decide to close your position to prevent any further loss. The new buy price is 1.31890 and the sell price is 1.31880, so you sell five contracts at 1.31880. Your £500,000 is now worth $659,425, calculated as [1.31880 x (100,000 x five contracts)], which means your loss is £4717.60 [($662,950 - $659,400) x your buy price of 1.3289].
Just remember that, with spot market trades, you’ll need to pay any overnight funding charges if you hold your position past 10pm UK time (international times may vary). If you want to avoid overnight funding, try futures instead.
