For example, the current bid-ask price for EUR/USD is 1.5775/1.5781 meaning you can buy 1 Euro for 1.5781 dollars. Suppose you see the trend of Euro growing against dollar and feel Euro is undervalued. To execute this strategy you would buy Euros (simultaneously selling Dollars) and then wait for the exchange rate to rise.
So you purchase 100 000 Euro (1 lot is Forex = 100 000) selling 157810 dollars. As you expected the EUR/USD rises to 1.5882/1.5888. Since you bought Euros and sold Dollars in your previous trade you must now sell Euros for Dollars to realize the profit. You can now sell 1 Euro for 1.5882 Dollars. When you sell the 100 000 Euros at the current rate you will receive 158820 USD.
Since you originally sold (paid) 157810 USD (158820-157810), your profit is 1010 USD. Your total profit = 1010 USD.
However, if the price falls down to the same amount of 0.0101 (as was the increase from the example above: 1.5882-1.5781=0.0101) or 101 pips (a ‘pip’ in Forex trading is the smallest tick in the price of a currency). You can lose 1010 dollars from the transaction.
