Components Of Forex Trading
The Forex deal is a contract agreed upon between the trader and market maker. The contract is comprised of following components:
It is the difference between Buy and sell, BID and ASK. In other words, we can say it is the difference between the purchase and the sell price at any given point of time.
Example: EURUSD currency rate is 1.3890-1.3892. Where in 1.3890 is the buy price and 1.3892 is the sell price. In general smaller spreads are better for Forex investors as they require a small movement in exchange rates in order to profit from a trade.
Price, Quote and indications
There are three kinds of quote in the market:
The price of 1 US dollar in terms of other currency e.g., Japanese yen, Canadian Dollar, etc.
The price of 1 unit of currency in terms of US Dollar e.g. British pound, Euro
Any quote which is not against the US Dollar is called “cross”. For example: GBP/JPY is a cross rate
- GBP/USD: 2.0000
- USD/JPY: 110.00
- SO GBP/JPY IS 2.0000 X 110.00= 220.00
Pip stands for “price interest poi6Et” and it represents the smallest fluctuation in price for a given currency pair. For most currencies, the exchange rate is carried out to the fourth decimal place. In this case, a pip is 1/10,000th of the counter currency or .0001
Example: If the ask price in the EUR/USD is 1.1315 and it goes up 1 Pip, the resulting rate will be 1.1316. Some exchange rates like the USD/JPY are only carried out to two decimal points. For these currency pairs, a pip is worth 1/100th of the counter currency
- When USD is the counter currency (EUR/USD), it is easier to calculate the value of one pip and the pip value is static.
- EUR/USD - 1 Pip=100,000 EUR x .0001 USD/EUR = US $10.00
- When the USD is the base currency, an extra step must be performed to convert the pip value into dollars. This is done by dividing by the current foreign exchange rate.
- USD/JPY - 1 Pip= 100,000 USD x .01 JPY/USD= 1,000 JPY/117.82 JPY/USD=US$8.49
- Again, your broker will usually calculate all this for you, but it's good to know.
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