What is *PIPS*?
The exchange of currencies is based on the basis of a price/point (pip) method. Every currency pair has its individual pip value.
If you look at an FOREX cost quote it will be that looks like this:
Forex Market Trading
A) If you are looking to buy EUR/USD ( that is, you purchase EUROS in exchange for USdollars ) you purchase 100,000 EUROS and then sell 122,130 USdollars which is, in other words, you earn
122,130 USUSD for 100,000 EUROS.
B) If you wish to sell the EUR/USD ( that is, you sell EUROS and buy USdollars ) you will purchase 122,100 US$ and then sell it for 100,000 EUROS or that is, you receive 100,000 EUROS for 122,100 US dollars.
The gap between the bid and the asking price is known as the spread. In the above example, the spread is 3 or 3 pip.
Because that the US dollar serves as the mainstay in the FOREX market It is generally thought of as the “base” currency used for quotes. Within the “Majors” this would include USD/JPY, USD/CHF , and USD/CAD. For these currencies, as well as many others, quotes are calculated in units of one dollar per second currency within the set.
For example , a figure of USD/CHF 1.3000 implies that for each U.S. dollar you receive 1.30 Swiss Francs. In other words that you will receive 1.30 Swiss Franc for each one USdollar.
If it is the case that U.S. dollar is the base unit and the rate of exchange goes up this means that the dollar has appreciated and the currency that is in opposition has been weakened. If the USD/CHF price is increased by 1.3050 the dollar is more powerful since it can now purchase much more Swiss Franc than it did before.
There are three exemptions from this: the British sterling (GBP) as well as The Australian dollar (AUD) and the Euro (EUR). In these instances you may find a quote like EUR/USD 1.2080 which means the for EURO you will receive 1.2080 U.S. Dollars.
In these three currencies, in which there is no base rate for the U.S. dollar is not the basis rate, a higher rate signifies a weakening dollar since it takes greater U.S. dollars to equal one Euro, British pound or an Australian dollar.
Also when a quote in a currency rises, it will increase that value for the base currency. A lower rate means that your base currency may be becoming weaker.
Currency pairs that don’t involve those that do not involve the U.S. dollar are called cross currency, however, the calculation follows identical. For instance, a figure of EUR/JPY 134.50 indicates it is the case that one Euro is equivalent in value to 134.50 Japanese yen.
How do I purchase ( heading ” LONG “)and SELL ( going ” SHORT “) in the FOREX Market?
Remember 2 extremely vital guidelines:
1. Cut down your LOOSING trades while letting your WINNING trades run
There will be losses on trades. Every FOREX trader is a victim of. The secret is that a disciplined and consistent trader at the end the day, will have more profitable trades than losing ones.
If you can notice on your charts and you are certain that you’re in a losing position do not continue losing money. The majority of novice traders have lowered their stop loss to “prove they’re correctly” and “hoping for the markets to change”. The majority of these trades, end up losing more money. Most profitable trades are “right” right away.
Keep in mind that smart traders recognize that there are numerous different opportunities. Cut your losses in half and increase the winnings from those positions.
2. Never make a trade on FOREX without placing the stop Loss Order.
Place a STOP order in conjunction with your entry order, through your trading platform online, to avoid potential loss.
Before launching any trade you need to determine the point at which ( the price) you are likely to be incorrect as the market changed direction and you would prefer to reduce your losses.
To earn a profit to make money, in the FOREX market, traders can trade using an *buy position* (known by the term “long”) and an *sell position* (known being “short”).
For a case study, let’s say you’ve studied the EURO. The EURO is first paired to USD, which is the U.S. dollar or USD.
Your trading strategies or rules, strategies and strategies. You are told it is likely that EURO will be able to rice within the next two weeks. so you decide to buy the EUR/USD currency pair, meaning that you are simultaneously buying EUROS and sell dollars).
You open up your excellent trading station software and you see that the EUR/USD pair is trading at:
If you think that the price of the EUR/USD pair will rise higher, you’ll be able to be in a “buy” position on the market.
For instance, let’s suppose you purchased one lot of EUR/USD at 1.2013. So long as you can return the currency at a higher cost the profit is made.
To show a typical FX SELL transaction, take a look at this scenario that involves the USD/JPY currency pair
Be aware that selling (“going short”) the currency pair means selling the base currency and then buying the quote currency. You will sell the currency pair in the event that you believe that it is likely that the currency of base (USD) will fall in relation to the currency of quote (JPY) or, in other words you believe that the currency of quote (JPY) will rise in comparison with the currency of base (USD).
How can I calculate PROFIT OR LOSS?
These Profit Calculations based on the trade scenario for short-sells below might seem a bit complicated If you’ve never had the opportunity to experience the FOREX market prior to now, but the process is continuously calculated through the broker’s Trade Station (software). I’ll show you how to do this below, so that you can see the way a profit could occur.
The current bid/ask value of USD/JPY stands at 107.50/107.54 This means that you can purchase USD for $1 US for 107.54 JPY, or trade one dollar US for 107.50 JPY.
If you believe that there is a possibility that US Dollar (USD) is undervalued against the currency of YEN (JPY). In order to implement this strategy, you’d have to sell USD (simultaneously purchasing YEN) and then just wait until the rate of exchange to increase.
Your trade could be as following: you buy 1 amount of USD (US 100,000) and you purchase one lot of JPY (10,754.000 JPY). (Remember that, with a 0.25 percent margin the starting margin for this transaction would be 250.)
Like you’d expect the USD/JPY rate drops to 106.50/106.54 This means that you can purchase USD for $1 US at $106.54 Japanese YEN or sell $1 US for 106.50.
Because you’re short dollars (and have a long position in YEN) it is now time to purchase dollars and sell the YEN in order to earn any profits.
You purchase US 100,000 at today’s rate of USD/JPY of 106.54 You receive 10,654,000 YEN. Because you initially purchased (paid in exchange for) 10754,000 YEN the profit you earn will be 100,000 YEN.
To determine the amount of your P&L as US dollars, multiply 100,000 times the present rate USD/JPY of 106.54
Total profit is US $938.61