Detailed description
You have a EUR 1,000 account and would like to buy a full lot (100,000) of the pair USD/JPY.
Step 1
You decide to buy the pair at the following rates:
USD/JPY 110.00/110.03
EUR/JPY 160.00/160.03
NOTE: We will use the EUR/JPY rate to transform the trade currency into your euro account base currency.
To buy 100,000 USD with JPY, the broker provides you 100,000 USD x 110.03 (The ask price), which equals 11,003,000 JPY. With 11,003,000 JPY, you buy 100,000 USD.
Having used 1:100 leverage, you are able to open this position with a 1,000 USD investment (110,030 JPY). EUR 687.69 (110,030 JPY / 160.00) is used as margin to cover your position. You are left with a EUR 312.31 balance in your account. Now you have an open long position.
Step 2
When you sell the pair, the rates are:
USD/JPY 110.70/110.73
EUR/JPY 160.01/160.04
You sell USD at 110.70 for a total of 11,070,000 JPY. Your profit is 67,000 JPY ( 11,070,000 – 11,003,000), i.e. 67,000 JPY / 160.04 (ask price) = 418.65 EUR. This means that your account now contains 1,418.65 EUR (1,000.00 initial account’s amount + 418.65 profit).
Using leverage to your advantage, you made a 61% (100 x 418.65 / 687.69) profit in one day. Only in the Forex market can you make such huge profits, so quickly.
Long summary
Step 1
When you buy the pair the rate is:
USD/JPY 110.00/110.03
You buy 100,000 USD against JPY at 110.03.
Step 2
When you sell the pair the rates is:
USD/JPY 110.70/110.73
The difference between the selling and buying price is 110,70 – 110,03 = 0.67 JPY: this is your profit for each USD invested, for a total of 100,000 USD x 0.67 JPY = 67,000 JPY, or 418.65 EUR, as seen above.