1. What exactly are *PIPS*?
Currency is exchanged on a price/point (pip) basis. Each currency pair's pip value is unique.
When you see a FOREX price quote, it will look something like this:
1.2210/13 EUR/USD
2. Explanation of PIPS
- To BUY the EUR/USD (meaning you BUY EUROS and SELL US$), you buy 100,000 EUROS and SELL 122,130 US$, or you receive 122,130 US$ in exchange for 100,000 EUROS
- To SELL the EUR/USD (that is, to SELL EUROS and BUY US$), you buy 122,100 US$ and sell 100,000 EUROS, or you receive 100,000 EUROS for 122,100 US$.
The spread is defined as the difference between the bid and asks prices. The spread in the above case is 3 pips.
Because
The US dollar is the focal point of the FOREX market, it is commonly used as the 'base' currency for quotations.
This covers
The "Majors" USD/JPY, USD/CHF, and USD/CAD. Quotes for these currencies, as well as many others, are given as $1 USD per the second currency listed in the pair.
A quotation of USD/CHF 1.3000, for example, implies that for one US dollar, you receive 1.30 Swiss Francs, or that you receive 1.30 Swiss Francs for each 1 US$.
When the US dollar is the base unit and a currency quotation rises, it implies the dollar has gained value while the other currency has lost value. If the USD/CHF quotation above rises to 1.3050, the dollar becomes stronger since it will now purchase more Swiss Francs than before.
The British pound (GBP), the Australian dollar (AUD), and the Euro area the three exceptions to this rule (EUR). In certain situations, you could see a rate like EUR/USD 1.2080, which means that for one Euro, you get 1.2080 US dollars.
A rising quotation implies a weakening dollar in these three currency pairs where the US dollar is not the base rate, since it now takes more US dollars to equal one Euro, British pound, or Australian dollar.
In other words
If a currency quote rises, the value of the base currency rises as well. A lower quotation indicates that the underlying currency is losing value.
Cross currencies are currency pairs that do not include the US dollar, yet the computation is the same. A price of EUR/JPY 134.50, for example, indicates that one Euro is equivalent to 134.50 Japanese yen.
3. HOW TO BUY (GOING "LONG") AND SELL (GOING "SHORT") IN THE FOREX MARKET?
Keep the following two guidelines in mind:
1) Close your lost transactions and let your winning ones run.
YOU WILL EXPERIENCE LOSSES IN TRADES. Every FOREX trader possesses. The trick is that a steady, disciplined trader ends up with more winning transactions than losing trades.
Don't keep losing money if you can clearly see on your charts that you are in a losing transaction.
Most beginner traders reduce their stop loss merely to "show they are correct" or "hope the market will turn." Ninety-nine percent of these deals result in additional losses. The majority of winning deals are generally "correct" straight away.
Remember, astute traders, are aware that there are several alternative chances. CUT your losses short and build on your winnings.
A trader in FOREX might benefit by entering the market with a *buy position* (also known as going "long") or a *sell position* (known as going "short").
Assume you've been researching the EURO, for example. The EURO is first linked with the US dollar, abbreviated as USD.
Your trading techniques, rules, tactics, and so on tell you that the EURO will rice in the next two weeks, so you purchase the EUR/USD pair, which means you will simultaneously buy EUROS and SELL dollars).
4. How To profit in Trading FOREX
A trader might join the market with a *buy position* (also known as going "long") or a *sell position* (known as going "short").
Assume you've been studying the EURO. The EURO is first linked with the US dollar, or USD.
Your trading techniques, rules, tactics, and so on tell you that the EURO will rice in the next two weeks, so you purchase the EUR/USD pair, which means you will simultaneously buy EUROS and SELL dollars).
You open your superb trading station software and notice that the EUR/USD pair is trading at:
- 1.2010/1.2013 EUR/USD
You will establish a *buy position* in the market if you believe the market price for the EUR/USD pair will rise.
Assume you purchased one lot of EUR/USD at 1.2013. You gain money as long as you sell the pair at a higher price.
Consider the following situation utilizing the USD/JPY currency pair to illustrate a typical FX SELL trade:
REMEMBER
Selling the currency pair ("going short") entails selling the first, base currency, and buying the second, quote currency.
You sell the currency pair if you believe the base currency (USD) will fall in value compared to the quote currency (JPY), or vice versa if you believe the quote currency (JPY) will rise in value relative to the base currency (USD).
5. HOW DO I DETERMINE PROFIT OR LOSS?
If you've never traded in the FOREX market before, the Profit Calculations on the Short-sell trade scenario below may appear fairly difficult, but this procedure is constantly computed through your broker trade station (software). I'll walk you through this procedure so you can SEE how a PROFIT may happen.
The current USD/JPY bid/ask rate is 107.50/107.54, which means you can buy $1 US for 107.54 YEN or sell $1 US for 107.50 YEN.
Assume you believe the US Dollar (USD) is overpriced in relation to the Japanese Yen (JPY). To carry out this approach, you would sell dollars while concurrently purchasing yen, and then wait for the exchange rate to climb.
Your deal would be as follows: you sell 1 lot USD (the equivalent of $100,000 USD) and acquire 1 lot JPY (10,754.000 YEN). (Remember, your first margin deposit for this transaction would be $ 250 at a 0.25 percent margin.)
USD/JPY falls to 106.50/106.54, as predicted, implying that you can now buy $1 US for $106.54 Japanese YEN or sell $1 US for 106.50.
Because you are short dollars (but long YEN), you must now buy dollars and sell the YEN to make a profit.
You purchase $100,000 in the United States at the current USD/JPY rate of 106.54 and earn 10,654,000 YEN. Your profit is 100,000 YEN because you initially purchased (paid for) 10,754,000 YEN.
Divide 100,000 by the current USD/JPY rate of 106.54 to determine your profit and loss in US dollars.
- Total profit = $938.61 USD
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