Beginning FOREX - How Are Lots Traded & What The Heck Is A Pip?

If you are new to Forex, no doubt you are confused by all of the strange and unfamiliar terminology. For example, what is a pip? Also, you are probably already aware that Forex trading can be risky. How can you limit your loss and best protect your funds? This article briefly covers how currency lots are traded to help you better understand how to plan your trading strategy and manage your funds.

In Foreign Currency Exchange (FOREX), earnings are expressed in "pips". Pip is short for Price Interest Point, also called points. Whereas the smallest denomination in USD is the penny ($.01), in Currency Exchange, funds can be traded in an even smaller denomination, $0.0001. This means that very small movements in currency prices can create large profits.

So, a PIP is the smallest unit a currency can be traded in. The actual value of a pip is not a set price. If you are trading with a standard account, a pip is worth $10. If you are trading a mini account, a pip is only worth $1.

The value of a pip changes based upon the size of your account, because the size of your account affects how much currency you can leverage. A standard full size trading account is 100,000 units of the base currency. If you are trading in USD, a standard account has a value of $100,000 USD.

A mini lot is 10,000 units of base currency. If you are trading mini lots, you can leverage $10,000. This is why a pip in a mini account is worth less than a pip in a standard full sized account.

While Forex trading allows you to leverage more funds than you actually have, this can be a double edged sword. While you can make profits on funds that you leverage (rather than own), you can also have losses amplified as well. There are several ways, however, to manage your risk when trading Forex. If you are interested in trading Forex, you should have a definite trading strategy. You must educate yourself to know when to enter and exit the market and what kind of movements to anticipate.

You can also place something known as a stop loss order. Stop-loss orders the typical way traders minimize risk when placing an entry order. A stop-loss order to exit your position if the currency price reaches a certain point.

If you are taking a long position, you would place the stop loss order below current market price. For a short position, you would place a stop loss order above current market price. This technique allows you to manage your risk and, just as the name suggests, stop your losses at a certain point.

As you can see, Forex trading can be complex, but once you understand the basic fundamental principals of how lots are traded, its starts to come together for you. Foreign Currency Trading can be quite profitable and and exciting way to invest.

Beginning Forex (Currency) Trading

Foreign exchange (forex) currency trading, the largest financial market in the world, requires a minimum of capital to invest and the profits can be substantial. Once you have learned the basics of forex, you’re on the way to making money through the simultaneous buying or selling of currencies. Forex trading is instantaneous; as soon as you click the mouse, it’s done. The most commonly traded currencies, easiest to liquidate, are the U.S. dollar, Japanese yen, British pound, Swiss Franc, the Canadian dollar, Australian dollar, and the Eurodollar.

Unlike the stock market, forex trading has no central exchange. With forex, you can make a profit whether the market is up or down vs. only making money when the stock market is on the rise. By taking the long position with a pair of currencies, the forex trader buys at one price and sells when it reaches a higher price. The other option for the forex trader is to go short by selling currencies, anticipating depreciation, and then buying back when the value falls. The forex trader can pick either direction, long or short, and if correct, he will generate a profit. You can also set up a certain point (limit order) based on the amount of profit you want to earn to automatically limit the order. In the same way, you can stop or close an order to automatically liquidate if the currency trade is going against you.

In general, the strength of a country’s economy determines the value of its currency. Other factors to take into consideration in forex trading are the political and social status of the country, interest and employment rates, and the overall stability of its government. You will learn to see patterns or trends as you become more familiar with the in’s and out’s of forex trading.

The Forex market is a 24-hour trading place, Sunday through Friday, giving you the option of trading at any time of the day or night. Unlike the stock market, it doesn’t close with the ringing of the bell. Forex online firms provide demos, guidance, and market news for the beginning investor. You can practice your skills in forex trading before actually investing real capital. Once you’ve learned the basics, a minimum investment is made, sometimes as low as $200.00. These “mini-trading” accounts are a good way to begin forex trading and often there is no commission attached to your trading. You don’t have to be a seasoned market analyst or economist to learn, enjoy, and make money with forex currency trading.

Beginner’s Overview of Foreign Currency Exchange

Foreign currency exchange trading can be very rewarding, but can also be very intimidating to a beginner.  To get started, you will need to know some basics:

   1. What is foreign currency exchange?
   2. How is it traded?
   3. What are the benefits?
   4. What are the risks?
   5. How can I get started?

What is Foreign Currency Exchange?

The Foreign currency exchange (FOREX) market is a cash (or “spot”) market for currency.  Unlike the stock exchange, the FOREX market is not located on a trading floor or centralized on an exchange.  Instead, it is entirely electronic within a network of banks and runs 24 hours per day Sunday evening (5:00 pm EST) through Friday evening (4:00 pm EST), excluding some holidays.  The fact that it is all electronic means that you can tap into it from your computer.

How is it traded?

FOREX is traded in currency pairs, for example EUR/USD is the Euro base currency and the US dollar counter (or quote) currency.  There are six major pairs: EUR/USD, GBP/USD (Great Britian pound vs. US dollar), USD/JPY (US dollar vs. Japanese yen), USD/CAD (US dollar vs. Canadian dollar), AUD/USD (Australian dollar vs. US dollar), and USD/CHF (US dollar vs. Swiss Franc).

Currencies are traded in dollar amounts called lots.  For a “standard” account, one lot (called a standard lot) is $1,000 and controls $100,000 in currency.  For example, when you place an order to buy one lot of EUR/USD, you are buying the EUR and simultaneously selling the USD.  The margin you must put up to place the order is $1000 (for a standard lot).  You are going long the EUR and expecting it to strengthen against the USD.  For every increase of $0.0001 in the EUR, you make one “pip” (price interest point) equivalent to $10 per lot traded.

Similarly, for a “mini-account” when you place an order to sell one mini-lot (one-tenth of a standard lot) of EUR/USD, you are selling the EUR and simultaneously buying the USD.  You are going short the EUR and expecting it to weaken against the USD.  The margin requirement is $100.00 per mini-lot.  For every decrease in the EUR of $0.0001 you make one pip equivalent to $1 per mini-lot traded.

Note that unlike trading stocks, there are absolutely no restrictions on short-selling in FOREX.  Short-selling is exactly like buying – except that you’re selling of course.

The pip value and amount per pip per lot differs when the USD is not the counter or quote currency.  For example, when buying the USD/JPY pair with a ask price of 109.00 (meaning 1 USD equals 109.00 yen), a change in the Japanese yen of 0.01 yen is equivalent to 1 pip or $9.17 per pip per lot traded ($9.17 = $100,000 x 0.01 / 109.00).

The broker makes money off the spread which is the difference in the quotation ask and bid prices.  You buy the base currency at the ask price and sell it at the bid price.  Generally, the major currency pairs have relatively low spreads.  The EUR/USD is commonly two to three pips and the GPD/USD is commonly four to five pips.  For example, the current bid/ask price for EUR/USD is quoted at 1.2322/1.2324.  This means that you can buy 1 EUR (the base currency) for $1.2324 USD (the counter-currency).  You buy at the ask price.  You can sell 1 EUR for $1.2322 USD (you sell at the bid price). You will pay the broker the spread or $1.2324 - $1.2322 = $0.0002 = 2 pips. For a standard lot, the broker fee (in this example) is $10 x 2 pips = $20 per standard lot for a roundtrip trade (1 buy and matching sell or 1 sell and matching buy).  For a mini-lot, the fee would be $1 x 2 pips = $2 per mini-lot for a roundtrip trade. The broker fee is automatically deducted from your account.

Obviously, if you buy (go long) a currency pair, you expect the base currency to increase in price.  Your objective is to sell later at a price higher than you purchased and make a profit.  On the flip side, if you sell (go short) a currency pair, you expect the base currency to decrease in price.  Your objective is to buy later at a price that is lower than the price you originally sold, and thus make a profit off the difference.

There’s more to it than can be explained in this overview, but you should get the basic idea.

What are the benefits?

1. With FOREX trading, there is no inventory, no employees, and no customers.  Your overhead can be as minimal as a home computer with internet access.

2. You can get started with a “mini-account” investing as little as $300.

3. Currency prices tend to repeat in relatively predictable cycles creating strong trends. Once you learn how to trade properly, you can compound your money, and potentially turn a little into a lot.

4. You can trade for a few hours per week, or much more if you want to. It’s all up to you.

5. The FOREX market is very liquid, with trillions of dollars traded every day.  On its slowest day, orders can usually be placed within a few seconds if you stay with the major currencies.  Instantaneous execution (1 to 2 seconds) is the norm during normal trade volume days (for the major currencies).

6. You can trade from just about anywhere as long as you have a computer with internet access to your account.

What are the risks?

1. The market can be very volatile, especially during times of major news releases, also known as “fundamental announcements.”  The time of these announcements is usually known in advance.  Many traders simply stay out of the market during these announcements and wait until market volatility has settled back down.

2. If you use too much margin or risk too much on any one trade, your account could suffer badly on a trade that doesn’t go your way.  Proper risk management, including sound placement of stops and not risking more than 2 percent of your account on any one trade, can alleviate this risk.  Do not risk more money than you can afford to lose.

3. A major world event could trigger a huge volatility swing that could wipe out your account (or even more).  However, some brokers limit the loss to the amount in your account.  (Of course, a major world event could also cause the trade to go your way.)

4. Trader psychology (fear and greed) can play a big role in your success or failure as a trader.  Trading education is one of the keys to overcoming these human flaws.

5. You could fail to place a stop loss with your order.  A change in price could force a liquidation of your trade if your account falls below the required margin maintenance.  To alleviate this risk, always set a stop loss when you place an order.

This list is not meant to be inclusive. There are other risks.

How can I get started?

You can easily open an online account by selecting one from many available FOREX brokers.  You can, and should open a demo account to practice (and learn) for several months for free.  The practice account makes simulated trades using real-time data.  This is called “paper trading.” You should not trade your real account until you have proven to yourself that you can be profitable in your demo account.

Once you get started, you can trade currencies from just about anywhere.  About all you need is a computer with internet access to your trading account.  Many brokers also provide free charting software.

Jim McCabe

Become a Better Trader

It is a well documented fact that within the “business” of trading the financial markets, as much as 90 % of the participants lose and continue to lose money. So if 90 % are losing, that therefore means that 10% are gaining each and every time.

In order to improve my own trading record, I deliberately set out to try and discover what it was I had to do to become one of the 10% (The Winners) who are consistently making money from the unfortunate remaining 90%  (The Losers) who don’t.

My research and investigations was to speak to as many successful traders as I could, to read as many articles, publications and books which have been written by successful traders. It wasn’t until I started my research, that I quickly realised just how much has been and no doubt will continue to be written about trading and the psychology of trading. What is even more astounding is the amount that has been written by so called “gurus” who actually haven’t made any significant amounts of money from a business that they are supposed to be experts in. I will tell you about some of my findings relating to these authors in future articles.

It is my intention to publish my findings in a series of articles over the next 3 months and I hope you can learn and improve your own trading from implementing the information which I release.

I personally trade the FOREX market now but I have tried trading stocks, futures, commodities and options. I will be covering the reasons for concentrating on FOREX in a later article but in the meantime let me tell you about one of my many discoveries.

Every one of the successful traders I interviewed, stressed the importance of keeping a journal of their trades. They would record the date, time, what they traded, buy or sell, price, indicators used including levels and/or figures, trends (long, medium and short) and an overall description of why they took the trade. It was also imperative that the journal entry included notes about the trade after the event. If it made money what was the criteria, and if it was a losing trade, why had it turned out to be like this and any contributing factors.

Now comes the interesting part. Everyone of them stated that they regularly reviewed their journal (some weekly and some monthly) but everyone quite categorically looked back over past trades. No doubt learning from their mistakes and to improve and repeat on their successful trades.

Trading is very disciplined  with definite rules for entering and exiting trades. These rules must be adhered to at all times and one of the rules is entering all details about the trade in the journal, making no exceptions.

I hope you will all learn something from this and if you aren’t already maintaining a record of your trades, then please start doing so from now on. Also regularly go back over your records on a regular basis. You will  see a marked improvement in your performance.


http://www.HomeForexTrading.com

Be A Forex Expert

Any one who has ventured into the real market place would definitely have an idea what a Forex is and share the many promises and possibilities this horizon can bring.

What Is Forex?

FOREX stands for the very popular Foreign Exchange Market. Sometimes, though, people associate it or equate it to mean also currencies.

Basically, forex is where people trade. The objects of the trading are the different foreign currencies. People buy and sell the currencies.

The exchange market and the trading as we know it today started in the 1970’s. It has no definite place. It has no definite location. The foreign exchange market is found wherever there is a financial center where people conduct constant exchanges and buying and selling.

To ensure definite success in this field, the main goal has to be kept in mind. The keywords to traders in the foreign exchange market are to ‘buy low and sell high.’ This is the way to get the profits coming in.

Why Are People Trading in the Forex?

More and more people are turning into the forex trading now. It has become popular once again and people want to enjoy the success this can bring.

There are also no strict requirements to join the market. Anybody can enter it and learn how to trade. Some even study beforehand to be prepared for the big trading.

Another good aspect about forex is the absence of too many fees to be able to join in. There are no commissions, no brokerage fees and no government fees.

The best thing by far is that trading can be done at home. Anyone can initiate a trade online. This spells big for people who stay at home, especially those who do not feel comfortable in engaging on online businesses. With proper training and computer with internet access at hand, success is within the bounds of the home.

How Does One Trade Successfully in the Foreign Exchange Market?

The purpose of ‘to buy low and to sell high’ must be kept in mind when trading in the forex. This will be the main vision of a trader to succeed.

The next task at hand is to know the trends. This means knowing when a particular currency will buy low or sell high. This is not mere prediction of possible turn of events.

Thus, forex requires strategies that have been tested to make sure that a decision will be profitable. There are two basic strategies employed in forex that one can learn from tutorials or from the actual exposure to the market.

The first strategy is the technical analysis.

This provides that a particular price chain reflects all the necessary information regarding the market. This entails a close analysis of the various aspects of the currency like the lowest and highest prices or the opening and closing prices.

The other strategy is the fundamental analysis.

As the name implies, it takes the overall situation. It focuses beyond the currency. It takes into account the situation of the country, economy, politics and even the rumors. Thus this requires more exposure and knowledge from the part of the trader.

Conclusion

The foreign exchange market promises so many possibilities to the trader. Many people may be interested in the forex but are only afraid to take the first step. This attitude should be turned around. Just have a good vision, take the necessary steps and make the forex venture a success.

All Rights Reserved, This content may be reprinted as long as it remains unchanged and the links are intact and active.

Basic Introduction To Forex Trading

If you were wondering; forex trading is nothing more than direct access trading of different types of foreign currencies. A few years ago, foreign exchange trading was mostly limited to large banks and institutional traders however; today technological advancements have made it so that small traders can also take advantage of the many benefits of forex trading just by using the various online trading platforms to trade.

The currencies of the world are on a floating exchange rate, and they are always traded in pairs Euro/Dollar, Dollar/Yen, etc. About 85 percent of all daily transactions involve trading of the major currencies.

Four major currency pairs are usually used for investment purposes. They are: Euro against US dollar, US dollar against Japanese yen, British pound against US dollar, and US dollar against Swiss franc. Right now I will show you how they look in the trading market: EUR/USD, USD/JPY, GBP/USD, and USD/CHF. As a note you should know that no dividends are paid on currencies.

If you think one currency will appreciate against another, you may exchange that second currency for the first one and be able to stay in it. In case everything goes as you plan it, eventually you may be able to make the opposite deal in that you may exchange this first currency back for that other and then collect profits from it.

Transactions on the FOREX market are performed by dealers at major banks or FOREX brokerage companies. FOREX is a necessary part of the world wide market, so when you are sleeping in the comfort of your bed, the dealers in Europe are trading currencies with their Japanese counterparts.

Therefore, it is reasonable for you to believe that the FOREX market is active 24 hours a day and dealers at major institutions are working 24/7 in three different shifts. Clients may place take-profit and stop-loss orders with brokers for overnight execution.

Price movements on the FOREX market are very smooth and without the gaps that you face almost every morning on the stock market. The daily turnover on the FOREX market is somewhere around $1.2 trillion, so a new investor can enter and exit positions without any problems.

The fact is that the FOREX market never stops, even on September 11, 2001 you could still get your hands on two-side quotes on currencies. The currency market is the largest and oldest financial market in the world. It is also called the foreign exchange market, FX market for short. It is the biggest and most liquid market in the world, and it is traded mostly through the 24 hour-a-day inter-bank currency market.

When you compare them, you will see that the currency futures market is only one per cent as big. Unlike the futures and stock markets, trading currencies is not centered on an exchange. Trading moves from major banking centers of the U.S. to Australia and New Zealand, to the Far East, to Europe and finally back to the U.S. it is truly a full circle trading game.

In the past, the forex inter-bank market was not available to small speculators because of the large minimum transaction sizes and strict financial requirements.

Banks, major currency dealers and sometimes even very large speculator were the principal dealers. Only they were able to take advantage of the currency market's fantastic liquidity and strong trending nature of many of the world's primary currency exchange rates.

Today, foreign exchange market brokers are able to break down the larger sized inter-bank units, and offer small traders like you and me the opportunity to buy or sell any number of these smaller units. These brokers give any size trader, including individual speculators or smaller companies, the option to trade at the same rates and price movements as the big players who once dominated the market.

As you can see, the foreign exchange market has come a long way. Being successful at it can be intimidating and difficult when you are new to the game. So if you want to step into this market, first thing you do is get the right knowledge and educate yourself until you feel ready to jump in.