To illustrate a Forex trade, consider the following two examples.

There is a simple formula for this:

1 pip in the decimal form / the current exchange rate of the quote currency to the US Dollar = value per pip.

Profit Example :

Current bid/ask for EUR/USD is 1.4616/19, meaning you can buy 1 euro for 1.4619 or sell 1 euro for 1.4616.

Suppose you decide that the Euro is undervalued against the US dollar. To execute this strategy, you would buy Euros (simultaneously selling dollars), and then wait for the exchange rate to rise.

So you make the trade: to buy 100,000 Euros you pay 146,190 dollars (100,000 x 1.4619). Remember, at 0.5% margin, your initial margin deposit would be approximately $731 for this trade.

As you expected, Euro strengthens to 1.4623/26. Now, to realize your profits, you sell 100,000 Euros at the current rate of 1.4623, and receive $146,230

You bought 100k Euros at 1.4619, paying $146,190.

Then you sold 100k Euros at 1.4623, receiving $146,230.

That’s a difference of 4 pips, or in dollar terms ($146,190 – 146,230 = $40).

Total profit = US $40.

Loss Example

We buy EUR/USD when trading at 1.4616/19. You buy 100,000 Euros and you pay 146,190 dollars (100,000 x 1.4619).

However, Euro weakens to 1.4611/14. Now, to minimize your losses you sell 100,000 Euros at 1.4611 and receive $146,110.

You bought 100k Euros at 1.4619, paying $146,190.

You sold 100k Euros at 1.4611, receiving $146,110.

That’s a difference of 8 pips, or in dollar terms ($146,190 – $146,110 = $80)

Total loss = US $80.

Remember that the US Dollar is a quote currency in many pairs (EUR/USD, GBP/USD etc.). It means that the exchange rate of the quote currency to USD equals to 1.