The most common increment of currencies is the Pip. If the EUR/USD moves from 1.2250 to 1.2251, that is ONE PIP. A pip is the last decimal place of a quotation. The Pip is how you measure your profit or loss.
As each currency has its own value, it is necessary to calculate the value of a pip for that particular currency. In currencies where the US Dollar is quoted first, the calculation would be as follows.
Let’s take USD/JPY rate at 119.80 (notice this currency pair only goes to two decimal places, most of the other currencies have four decimal places)
In the case of USD/JPY, 1 pip would be .01
.01 divided by exchange rate = pip value
.01 / 119.80 = 0.0000834
This looks like a very long number but later we will discuss lot size.
.0001 divided by exchange rate = pip value
.0001 / 1.5250 = 0.0000655
.0001 divided by exchange rate = pip value
.0001 / 1.4890 = 0.00006715
In the case where the US Dollar is not quoted first and we want to get the US Dollar value, we have to add one more step.
.0001 divided by exchange rate = pip value
.0001 / 1.2200 = EUR 0.0008196
but we need to get back to US dollars so we add another calculation which is
EUR x Exchange rate
0.0008196 x 1.2200 = 0.00009999
When rounded up it would be 0.0001
1.7975.0001 / 1.7975 = GBP 0.0000556
.0001 divided by exchange rate = pip value
But we need to get back to US dollars so we add another calculation which is
GBP x Exchange rate
0.0000556 x 1.7975 = 0.0000998
When rounded up it would be 0.0001
You’re probably rolling your eyes back and thinking do I really need to work all this out and the answer is no. Nearly all forex brokers will work all this out for you automatically. It’s always good for you to know how they work it out.
The object of forex trading is to exchange one currency for another in the expectation that the price will change so that the currency you bought will increase in value compared to the one you sold.
How to Read Forex Quote
Currencies are always quoted in pairs, such as EUR/USD or USD/CHF. The reason they are quoted in pairs is because in every foreign exchange transaction you are simultanesouly buying one currency and selling another. Here is an example of a foreign exchange rate of the British pound versus the U.S. dollar:
GBP/USD = 1.7500
The currency to the left of the slash ("/") is called the base currency (in this example, the British pound) and the one on the right is called the quote currency or counter currency (in this example, the U.S. dollar).
When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. In the example above, you have to pay 1.7500 U.S. dollar to buy 1 British pound.
When selling, the exchange rate tells you how many units of the quote currency you get for selling one of the basis currency. In the example above, you will receive 1.7500 U.S. dollar when you sell 1 British pound.
The base currency is the “basis” for the buy or the sell. If you buy EUR/USD this simply means that you are buying the base currency and simultaneously selling the quote currency.
You would buy the pair if you belive the base currency will appreciate relative to the quote currency. You would sell the pair if you think the base currency will depreciate relative to the count currency.
First, you should determine whether you want to buy or sell.
If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a higher price. In trader's talk, this is called "going long" or taking a "long position". Just remember: long = buy.
If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a lower price. This is called "going short" or taking a "short position". Short = sell.
All Forex quotes include a two-way price, the bid and ask. The bid is always lower than the ask price.
The bid is the price in which the dealer is willing to buy the base currency in exchange for the quote currency. This means the bid is the price in which you the trader will sell.
The ask is the price at which the dealer will sell the base currency in exchange for the quote currency. This means the ask is the price in which you the trader will buy.
The difference between the bid and the ask price is popularly know as the spread.
Let's take a look at an example taken from a trading software:
On this EUR/USD quote, the bid price is 1.2293 and the ask price is 1.2296. Look at how this broker makes it so easy for you to trade away your money. If you want to sell EUR, you click "Sell" and you will sell Euros at 1.2293. If you want to buy EUR, you click "Buy" and you will buy Euros at 1.2296.
In the following examples, I am going to use fundamental analysis to help us decide whether to buy or sell a specific currency pair. If you always fell asleep during your economics class or just flat out skipped economics class, don’t worry, we will cover fundamental analysis in a later lesson. For right now, try to pretend you know what’s going on.
In this example euro is the base currency and thus the “basis” for the buy/sell.
If you believe that the US economy will continue to weaken, which is bad for the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will rise versus the US dollar. If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold euros in the expectation that they will fall versus the US dollar.
In this example the US dollar is the base currency and thus the “basis” for the buy/sell.
If you think that the Japanese government is going to weaken the Yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will rise versus the Japanese yen. If you believe that Japanese investors are pulling money out of U.S. financial markets and coverting all their U.S. dollars back to Yen, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.
In this example the GBP is the base currency and thus the “basis” for the buy/sell.
If you think the British economy will continue to do better than the United States in terms of growth, you would execute a BUY GBP/USD order. By doing so you have bought pounds in the expectation that they will rise versus the US dollar. If you believe the British's economy is slowing while the United State's economy remains vibrant, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.
In this example the USD is the base currency and thus the “basis” for the buy/sell.
If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc. If you believe that due to instability in Iraq and in U.S. financial markets the dollar will continue to weaken, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc.
I don't have enough money to buy $10,000 EUR. Can I still trade?
You can with margin trading! Margin trading is simply the term used for trading with borrowed capital. This is how you're able to open $10,000 or $100,000 positions with $50 or $1,000. You can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital.
Margin trading in the foreign exchange market is quantified in lots. We will be discussing "lots' more in-depth on our next lesson. For now, just think of the term "lot" as the minimun amount of currencies you have to buy. When you go to the grocery store and want to buy an egg, you can't just buy a single egg, they come in dozens or "lots" of 12. In Forex, it'd be foolish to buy or sell $1 EUR, they usually come in "lots" of $10,000 or $100,000 depending on the type of account you have.
You believe that signals in the market are indicating that the British Pound will go up against the US Dollar. You open 1 lot ($100,000) for buying the Pound with a 1% margin at the price of 1.5000 and wait for the exchange rate to climb. This means you now control $100,000 worth of British Pound with $1,000. Your predictions come true and you decide to sell. You close the position at 1.5050. You earn 50 pips or about $500. (A pip is the smallest price movement available in a currency). So for an initial capital investment of $1,000, you have made 50% return. Return equals your $500 profit divided by your $1,000 you risked to trade.
|Your Actions||GBP||USD||Your Money|
|You buy 100,000 pounds at the GBP/USD exchange rate of 1.5000||+100,000||-150,000||$1,000|
|You blink for two seconds and the GBP/USD exchange rate rises to 1.5050 and you sell.||-100,000||+150,500**||$1,500|
|You have earned a profit of $500.||0||+500|
When you decide to close a position, the deposit that you originally made is returned to you and a calculation of your profits or losses is done. This profit or loss is then credited to your account.
We will also be discussing margin more in-depth in the next lesson, but hopefully you're able to get a basic idea of how margin works.
No, this is not the same as rollover minutes from your cell phone carrier. For positions open at 5pm EST, there is a daily rollover interest rate that a trader either pays or earns, depending on your established margin and position in the market. If you do not want to earn or pay interest on your positions, simply make sure it is closed at 5pm EST, the established end of the market day.
Since every currency trade involves borrowing one currency to buy another, interest rollover charges are an inherent part of FX trading. Interest is paid on the currency that is borrowed, and earned on the one that is purchased. If a client is buying a currency with a higher interest rate than the one he/she is borrowing, the net differential will be positive (i.e. USD/JPY) – and the client will earn funds as a result. Ask your broker about specific details regarding rollover.
Forex is becoming more and more popular due to its availability over the internet and current high speed internet. Some people have made a living out of forex trading. Its not easy but we all have to start somewhere. Here there will be infomation on forex trading, forex brokers, forex signal, forex chart, technical study and fundamental study of forex and lots more.
There will be other posters, other forex traders that will contribute article here. Come and learn to trade forex. See how easy it is actually to make money and to lose money as well.
There are many reasons for these abysmal stats: lack of discipline, lack of money management skills, and the. I think the reason for the poor success rate is that 90% of the traders can’t manage their emotions while trading. This is the demon I fight daily. Money management and discipline are the symptoms, but emotions are the root cause!
From day one of trading the currency markets I have heard every guru shouting at the top of their lungs to cut you r loses and let your profits run. Or that anyone can put on a trade, but it is the professional trader that knows when to exit a trade. It seems like a simple concept to let your profits run and take those profits when the market offers them up to us. But why can’t we get this right?
The curse of all traders, the last and most difficult skill for us to overcome is to remove the emotions from our trading. Period!! Well I got news for you… you can’!! You, my friend, are a human being and thus an emotional being. OK, so we must trade emotional-less, but that is beyond the realm of most traders.
Letting emotions interfere with your trading can manifest in many ways. Let me just give you some examples of my past (and sometimes present transgressions):
Having the market retrace and return almost to my original entry point, exiting and having the market execute a classic continuation pattern to original target (a target that was selected in advance before the trade was executed)!
What do we do?
I have been following traders that focus solely on trading the news or other fundamental factors. Although this has some merit it won’t do squat for checking your emotions. Technical analysis should be your weapon of choice for keeping your emotions in check. Do you analysis before your trading session. Follow your trading plan (money management and strategy) as though your life depended upon it (your account balance certainly does!!). Visualize your trade execution like Tiger Woods does before every golf shot and above all, trust yourself! I repeat the following mantra before every trading session:
“I am the world’s most disciplined forex trader. I trade my plan and I plan my trade. I trade with confidence and decisiveness. If the reason for me to be in a trade no longer exists I will cut my losses or take profit without hesitation.”
I am an emotional person. It makes me feel alive, however when I trade I want to be a stone-cold, calculating pip capturing fool and leave the emotions for when I shank a drive into the water at the golf course.
Click here to visit my lens!
BTW, did you see Tiger Woods at the press conference after winning the PGA Championship? A reporter asked him if he expects to win every major he plays. Without hesitation Tiger said “yes.” There was an awkward silence while Tiger waited for the next question and the reporter waited for Tiger to expand upon his answer. I loved it and want us all to trade with the kind of confidence and discipline Tiger Woods displays while playing golf!
So why is this so critical? Now that you are a trained trader you have probably realized that your Forex Journey has only just begun. You have discovered that there are numerous strategies and approaches to trading this market. You have also noticed that in the end most of the strategies are viable and that the most volatile factor in any trade is the human interaction in the marketplace itself. I am sure, like me, you have discovered you are your own worst enemy! Having a compounding account ensures that you are trading from a centered base. Your pip goal is reserved and very attainable and your entry and exit strategies will reflect this conservative approach. Trading this account will also build discipline and allow you to avoid those huge draw downs. In this account you are not the gambler, but the casino. When was the last time you heard of a casino losing money on their gaming operations? You rely on a strategy to meet your daily pip goal (at least 3:1) and through money management you are keeping the long term odds in your favor like a casino operator. Your actions will then dictate your profitable results!
Do the math! See what your results would be if you started with a $3,000 mini account, risk no more that 5% on any given trade and made just 15 pips per day. How much will your balance be at the end of a year of trading? The results will astound you!!
For more about my trading visit my Lens!!
… “What advice can I provide to all those who are eager to learn the currency market with all that information out there without getting burned?”
I have come up with 3 Golden Rules to follow when evaluating currency training opportunities.
1. Know Thy Self – This is probably the most important advice I can provide. There is good training and bad training. Often the worst training has the best marketing plans. First figure out how you best learn information. Are you the type of person that can read a manual on rocket science and build a spaceship or are you a person that needs to be shown things through personal instruction and repetition? Figure out how you receive and process information and align Forex training source that fits your method of learning.
2. Don’t Believe the Hype – There is no golden system and it will take considerable effort to trade currencies successfully. Accepting these realities before embarking on your Forex Journey can save you tons of money and more importantly time spent climbing up the learning curve! If it sounds too good to be true, then it probably is. This should be no surprise! It is buyers beware market out there. Look for a Forex education company that can provide you with some solid aftercare resources.
3. Be Realistic – It is a journey and all good journeys take time to develop and flourish. This can be a remarkable journey, but one where you are apt to lose your account a few times before you surrender to the market and learn to take what the market is offering for profits that day. Listen to recommendations, but make decisions based on your own criteria, because in the Forex market this skill will serve you well!!
When reading internet-based sales letters or infomercial or forums, just remember that everyone has an opinion, but in the end the only one that matters is your!!
For more information visit my Lens!