Thursday, August 20, 2009

Know Your Profits & Losses (Forex Basics)

You've probably heard of the terms "pips" and "lots" but you don't what are of those terms. Here, I want to explain what they are and show you how they are calculated.

What is a pip?
A pip is the last decimal place of a quotation. The pip is how you measure profit or loss. If the EUR/USD moves from 1.2250 to 1.2251, that is 1 pip.

What is a lot?
Spot forex is traded in lots. The standard size for a lot is $100,000 but there's a mini lot size which is $10,000. Currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these increments, you need to trade large amounts of a particular currency in order to see any profit or loss.

Let's assume we will be using a $100,00o lot size. Let's recalculate and see how it affects the pip value.

USD/JPY at an exchange rate of 119.90
(.01/119.90) x $100,000 = $8.34 per pip.

USD/CHF at an exchange rate of 1.4555
(.0001/1.4555) x $100,000 = $6.87 per pip.

Let's take an example if we are using a $10,000 lot size.

USD/JPY at an exchange rate of 119.90
(.01/119.90) x $10,000 = $0.83 per pip.

USD/CHF at an exchange rate of 1.4555.
(.0001/1.4555) x $10,000 = $0.69 per pip.

What is leverage?
You might wondering how a small investor like you can trade large amounts of money. Think of your broker as a bank who basically fronts you $100,000 to buy currencies and all he asks is that you give him $1,000 as a deposit in which he will hold but not necessarily keep. This means for every $100,000 traded, the broker wants $1,000 as a deposit on the position.

What is a margin call?
In the event that money in your account falls below margin requirements (usable margin), your broker will close some or all your open positions which prevents your account from falling into a negative balance, even in a highly volatile, fast moving market.


Bookmark and Share


Post a Comment


The Forex Indicators © 2008 Business Ads Ready is Designed by Ipiet Supported by Tadpole's Notez