How Currencies are Traded?
Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second currency is called the counter or quote currency. The base currency is the "basis" for the buy or the sell. For example, if you buy EUR/USD you have bought Euros (and simultaneously sold dollars). You would do so in expectation that the Euro will appreciate (go up) relative to the US dollar.
Currencies are traded in lots, which represent 100,000 units of the base currency. If the EUR/USD is quoted at 1.2512, that means that 1 Euro is currently worth just over $1.25.
If the market moves from 1.2512 up to 1.2513 that represents a move of tick or one pip. A pip is the smallest increment a currency pair can move and in the case of the EUR/USD currency pair a pip is worth $10 in a 100K account and is $1 in a mini account. A mini account is One/Tenth of a Regular Account.
If you think that the Euro will rise relative to the U.S. Dollar you would buy one lot of the EUR/USD currency pair.
Suppose the EUR/USD is trading at 1.2250 and you buy it at this price and when you sell it, the price is at 1.2275. This means you just made a Profit of 25 pips.
You bought at 1.2250 and sold at 1.2275 for a profit of .0025 or 25 pips. Each pip is worth $10 in the 100K account therefore you make a profit of 25 pips x $10 = $250.00
In FX, Short for Forex, you also have the opportunity to SHORT SELL (sell first and buy later) a currency pair if you think it will fall in price. Short Sell means that you can sell without owning any thing in hand and later when the price falls you can buy at a much lesser price than your original sell price and hand it back to the person you sold to. Here you make a profit by first selling expensive and then buying cheap. The difference is your Profit.
If you think that the Euro will fall relative to the U.S. Dollar you would sell (Short) one lot of the EUR/USD currency pair.
Suppose EUR/USD is trading at 1.2250 and you sell it at this price and when you see the EUR/USD is trading at 1.2200 you buy it. You just made a profit of 50 pips. Therefore you made a profit of $500.00
The opposite will be true if the trade went the other way round. You will incur losses. In order to limit our losses we apply Stop Loss to our trade. In our case we shall use a Stop Loss of 10 pips. It means that we are willing to lose upto $100.00 not more than that.
In your next Lesson, you will Learn all about Charts and How to Read the Charts.
Keep watching for your Next Lesson...
No comments:
Post a Comment