FOREX TIP's

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As described in the article, What is Forex Trading, foreign currencies are traded in pairs. These are shown like this: EUR/USD. The first shown, in this case the Euro, is the base currency. The currency after the slash is the counter currency where quotes are expressed in terms of one unit of the base currency with respect to the counter currency.

EXAMPLE: EUR/USD = 1.5830 means One Euro equals 1.583 U.S. Dollars.
USD/CAD = 1.2304 means One U.S. Dollar equals 1.2304 Canadian Dollars.

Note that the base currency, regardless of country or origin, is always expressed in terms of the counter currency.

What is a Pip?

Most (but not all) currency pairs are expressed to four decimal points. If you can find a broker who uses five decimal points, this could give you a better price spread but it does not change the definition of a pip. A pip is the smallest price change a currency can make on the exchange. If a currency is priced to four decimal points, then one pip is in the 1/10,000th decimal position.

EXAMPLE: If the EUR/USD pair changes from 1.5830 to 1.5831, this is a 1 pip move.
If the USD/JPY moves from 110.30 to 108.31, this is also a 1 pip move.
If the EUR/USD changes form 1.5830 to 1.5840, this is a 10 pip move.
If the EUR/USD changes form 1.5830 to 1.5930, this is a 100 pip move.

Since EUR/USD is a four decimal point pair, one pip is the fourth decimal position for the pair above. Since the Japanese Yen only trades to two decimal points, however, 1 pip holds the 1/100th decimal place.

How to Read Forex Quotes

Like many stocks and commodities, a Forex quote is made up of two parts, a Bid and an Ask. The Bid is the price a buyer (i.e. “the market”) is willing to pay a seller for a currency pair at a given time. The Ask is the price at which a seller (i.e. “the market”) is willing to sell a currency pair for at any given moment. These are constantly changing, based on a “floating” market. An easy way to remember the difference is to think about it in terms of bidding at an auction, which is similar to how the market works. At an auction you BID on what you want to buy and ASK a minimum amount for what you want to sell. Easy, yes?

What is a Spread?

Now, the difference between the Bid and the Ask is called the Spread. This is important because the spread is how the market makers make their money. (This is why there is no commission in Forex trading.) Typical spreads range from 3 to 7 pips. You can get smaller spreads if you have a very large account but, for the average person, you should expect to pay at least 3 pips, but usually more like four or five. Obviously, the smaller the spread the better, since each pip usually equals $10.

EXAMPLE: EUR/USD = 1.5830/1.5833 = 3 pips spread

The Bid is always quoted first. In this example 1.5830 is the Bid price. If you want to buy this pair, you have to pay the Ask price of 1.5833, giving the market 3 pips. So, at 100:1 leverage, $30 is the fee you would pay to buy this pair. If you were selling a long position, you would receive the lower price, the Bid price.

In order to make money, then, you have to overcome the spread, in both buying and selling. So, say you bought the above pair, paying the three point spread and, when it came time to sell, there was also a three-point spread. This means that your position has to have moved at least 6 pips to break even. More than that and you would be in the money. That’s why it’s always a good rule of thumb to look for trades with the potential to move at least three times the spread in order to insure potential profit.

Assuring Best Spread

As stated above, prices and spreads change continuously, with spreads varying depending on market conditions and trading hours. News can also affect the spread, with spreads widening when a market becomes “hot.” One of the perils of this involves finding a quote you like but, before you can place your order, finding that it’s already changed. This can be avoided by finding a broker that uses a “freeze rate.” This electronic mechanism allows your rate to stay the same for several seconds, irrespective of the market’s movement, while you are placing your order and can, over a period of time, help you save considerable money on your trades.

That’s all there is to it! I hope you found this article helpful. In my next blog, I will cover margins. Thanks again for visiting Free Forex Tips .....Link......