Trader x has an account of USD 50'000. He buys EUR/USD 500'000 @ 1.1500 at the market and places a stop loss order at 1.1460.

At this point his maximum risk is USD 2'000 and his margin utilisation is 10%, well above the minimum.

During the day the market fluctuates and initially moves down to 1.1480.

At this point trader x has an unrealised loss of USD 1'000 and his margin utilisation has fallen to 9.60% reflecting the effect of the downward move on his margin capacity.

Later still the price moves back up to 1.1550 and trader x decides to take profit.

He sells at 1.1550 making a USD 2'500 profit which represents a 5% return on his account value.

Note that trader x took only a risk of USD 2'000 and made a return of USD 2'500 this equates to a risk/reward ratio of 1.25.

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.

Good Trading
Mark McRae