FOREX currencies are traded in much smaller divisions than cash. Whereas the smallest
division in US cash is the penny ($0.01), US currency can be traded on the FOREX in
divisions of $0.0001. This smallest division is called the pip (short for Price Interest Point –
sometimes just called 'points'). Since currencies are traded in large lots of (say) $100,000
- small movements in value can generate substantial profits and losses. In a lot of
US$100,000 one pip is worth $10 so an increase in 40 pips (4/10 of one cent) can generate
a profit or loss of $400.
Currencies are traded in lots of various sizes. The standard lot is 100,000 units of the
base currency. A unit is the currency name e.g. one unit of US dollars is the dollar. So a
100,000standard lot of US currency is worth $ . FOREX trades can have lots of various
sizes - a mini lot is 10,000 units, but the most trades are done using standard lots.
Various currencies have different sized pips. The US dollar is expressed in pips of 0.0001
while the Japanese yen is expressed in pips of 0.01. The value of a pip depends on the
size of a lot and the currency pair traded. Currency pairs with USD as the quote (second)
currency (e.g. CAD/USD) always have a pip value of $10 per standard lot or $1 per mini
lot. A pip value calculator can be used to calculate other currencies.
Order Types
A trader has at his disposal different types of orders to make FOREX trades. A clear
understanding of each type of order is necessary to be a successful FOREX trader.
Market Order – is an order to buy or sell at the current market price. They can be used to
enter or exit a trade. Market orders should be used with care because in fast-moving
markets there may be a difference between the price seen at the time a market order is
given and the actual price of the transaction. This is due to slippage – the amount the
market moves in the few seconds between giving an order and having it executed.
Slippage could result in a loss or gain of several pips.
Limit Order – is an order to buy or sell at a certain limit. They can be used to buy
currency below the market price or sell currency above the market price. When buying,
your order is executed when the market falls to your limit order price. When selling, your
order is executed when the market rises to your limit order price. There is no slippage
with limit orders.
Stop Order – is an order to buy above the market or to sell below the market. They are
most commonly used as stop-loss orders to limit losses if the market moves contrary to
what the trader expected. A stop-loss order will sell the currency if the market falls below
the point set by the trader.
One Cancels the Other (OCO) – this order is used when placing a limit order and a stoploss
order at the same time. If either order is executed the other is cancelled, allowing
the trader to make a transaction without monitoring the market. If the market falls, the
stop-loss order will be executed, but if the market rises to the level of the limit order, the
currency will be sold at a profit.
Example OCO Transaction:
Buy: 1 standard lot EUR/USD @ 1.3228 = $132,280
Pip Value: 1 pip = $10
Stop-Loss: 1.3203
Limit: 1.3328
This is an order to buy US dollars at 1.3328 and to sell them if they fall to 1.3203 (resulting
in a loss of 25 pips or $250) or to sell them if they rise to 1.3328 (resulting in a profit of 100
pips or $1,000).
Here's another example:
The current bid/ask price for US dollars and Canadian dollars is
USD/CDN 1.2152/57
...meaning you can buy $1 US for 1.2152 CDN or sell 1.2157 CDN for $1 US.
If you think that the US dollar (USD) is undervalued against the Canadian dollar (CDN)
you would buy USD (simultaneously selling CDN) and wait for the US dollar to rise.
This is the transaction:
Buy USD: 1 standard lot USD/CDN @ 1.2157 = $121,570 CDN
Pip Value: 1 pip = $10
Stop-Loss: 1.2147
Margin: $1,000 (1%)
You are buying US$100,000 and selling CDN$121,570. Your stop loss order will be
executed if the dollar falls below 1.2147, in which case you will lose $100.
However, USD/CDN rises to 1.2192/87. You can now sell $1 US for 1.2192 CDN or sell 1.2187
CDN for $1 US.
Because you entered the transaction by buying US dollars (buying long), you must now
sell US dollars and buy back CDN dollars to realize your profit.
You sell US$100,000 at the current USD/CDN rate of 1.2192, and receive 121,920 CDN for
which you originally paid CDN$121,570. Your profit is $350 Canadian dollars or US$287.19
(350 divided by the current exchange rate of 1.2187).
division in US cash is the penny ($0.01), US currency can be traded on the FOREX in
divisions of $0.0001. This smallest division is called the pip (short for Price Interest Point –
sometimes just called 'points'). Since currencies are traded in large lots of (say) $100,000
- small movements in value can generate substantial profits and losses. In a lot of
US$100,000 one pip is worth $10 so an increase in 40 pips (4/10 of one cent) can generate
a profit or loss of $400.
Currencies are traded in lots of various sizes. The standard lot is 100,000 units of the
base currency. A unit is the currency name e.g. one unit of US dollars is the dollar. So a
100,000standard lot of US currency is worth $ . FOREX trades can have lots of various
sizes - a mini lot is 10,000 units, but the most trades are done using standard lots.
Various currencies have different sized pips. The US dollar is expressed in pips of 0.0001
while the Japanese yen is expressed in pips of 0.01. The value of a pip depends on the
size of a lot and the currency pair traded. Currency pairs with USD as the quote (second)
currency (e.g. CAD/USD) always have a pip value of $10 per standard lot or $1 per mini
lot. A pip value calculator can be used to calculate other currencies.
Order Types
A trader has at his disposal different types of orders to make FOREX trades. A clear
understanding of each type of order is necessary to be a successful FOREX trader.
Market Order – is an order to buy or sell at the current market price. They can be used to
enter or exit a trade. Market orders should be used with care because in fast-moving
markets there may be a difference between the price seen at the time a market order is
given and the actual price of the transaction. This is due to slippage – the amount the
market moves in the few seconds between giving an order and having it executed.
Slippage could result in a loss or gain of several pips.
Limit Order – is an order to buy or sell at a certain limit. They can be used to buy
currency below the market price or sell currency above the market price. When buying,
your order is executed when the market falls to your limit order price. When selling, your
order is executed when the market rises to your limit order price. There is no slippage
with limit orders.
Stop Order – is an order to buy above the market or to sell below the market. They are
most commonly used as stop-loss orders to limit losses if the market moves contrary to
what the trader expected. A stop-loss order will sell the currency if the market falls below
the point set by the trader.
One Cancels the Other (OCO) – this order is used when placing a limit order and a stoploss
order at the same time. If either order is executed the other is cancelled, allowing
the trader to make a transaction without monitoring the market. If the market falls, the
stop-loss order will be executed, but if the market rises to the level of the limit order, the
currency will be sold at a profit.
Example OCO Transaction:
Buy: 1 standard lot EUR/USD @ 1.3228 = $132,280
Pip Value: 1 pip = $10
Stop-Loss: 1.3203
Limit: 1.3328
This is an order to buy US dollars at 1.3328 and to sell them if they fall to 1.3203 (resulting
in a loss of 25 pips or $250) or to sell them if they rise to 1.3328 (resulting in a profit of 100
pips or $1,000).
Here's another example:
The current bid/ask price for US dollars and Canadian dollars is
USD/CDN 1.2152/57
...meaning you can buy $1 US for 1.2152 CDN or sell 1.2157 CDN for $1 US.
If you think that the US dollar (USD) is undervalued against the Canadian dollar (CDN)
you would buy USD (simultaneously selling CDN) and wait for the US dollar to rise.
This is the transaction:
Buy USD: 1 standard lot USD/CDN @ 1.2157 = $121,570 CDN
Pip Value: 1 pip = $10
Stop-Loss: 1.2147
Margin: $1,000 (1%)
You are buying US$100,000 and selling CDN$121,570. Your stop loss order will be
executed if the dollar falls below 1.2147, in which case you will lose $100.
However, USD/CDN rises to 1.2192/87. You can now sell $1 US for 1.2192 CDN or sell 1.2187
CDN for $1 US.
Because you entered the transaction by buying US dollars (buying long), you must now
sell US dollars and buy back CDN dollars to realize your profit.
You sell US$100,000 at the current USD/CDN rate of 1.2192, and receive 121,920 CDN for
which you originally paid CDN$121,570. Your profit is $350 Canadian dollars or US$287.19
(350 divided by the current exchange rate of 1.2187).
No comments:
Post a Comment