Trader x has an account of USD 50'000.

He buys EUR/USD 500'000 at 1.4000 at the market and places a stop loss order at 1.3960.

At this point his maximum risk is USD 7'000 and his margin utilization is 14%, well above the minimum.

During the day the Forex market fluctuates and initially moves down to 1.3980.

At this point trader x has an unrealized loss of USD 1'000 and his margin utilization has risen to 16 % reflecting the effect of the downward move on his margin capacity.

Later still the price moves back up to 1.4080 and trader x decides to take profit. He sells at 1.4080 making a USD 4'000 profit which represents a 8 % return on his account value. Note that trader x took only a risk of USD 7'000 and made a return of USD 4'000 this equates to a risk/reward ratio of 0.57. A high risk reward ratio is what every trader should be aiming for.

The viewer should note that the example above is a random case scenario and in no way is meant to allude that the potential for profit is greater than the potential for loss in foreign exchange trading.

Familiarize yourself with Forex trading with our free Forex demo account.

Online Trading Academy - Comprehensive Forex Trading Education - 15 hours of high intensity Forex