How to read forex terminology
Making Sense of Forex terminology and how to read and understand numbers and codes is an important step towards a correct understanding of the market and to launch a successful career trader. We will look at expressions like spread, pip value, slippage, margin, leverage, or rollover. We tell you which things are important and which less.
Have we said something about the currency pairs, about how they arise, which are the most liquid currencies, which have the most stores in Forex. Now we will focus on how to read the forex data, as in abbreviations confess that things are important and which less.
Rate of currency pairs accompany us in our everyday lives. Like the tourists, or businessmen, still need to monitor the current exchange rates.
But if we see the exchange rate U.S. $ = £ 1.4917 . We know exactly what that means?
The first part,, £ ”is the base currency . In our case it is the British pound.
The second part, USD ”is the opposite or quotation currency . In our case it will be the U.S. dollar.
When buying exchange rate tells you how much you have to pay for quotation of units of currency, you can buy one unit of base currency. Ie. In our example, we have to pay $ 1.4917 to buy one British pound.
When selling exchange rate tells you how many units of exchange quotation you get when you sell 1 British pound. Ie. In our example, we receive 1.4917 U.S. dollars when we sell 1 British pound.
I hope that we are also now clear that if we are talking about currency pairs and their courses, so it is very important the order in which we present currency pair. Another is at the same time the nominal exchange rate GBP USD and another will be U.S. $ nominal exchange rate of GBP.
Still not clear?
So once again. Currencies are traded in pairs such as the euro against the U.S. dollar (EUR / USD) or U.S. dollar and Japanese yen (USD / JPY). The first currency of the pair is called the base currency and the second is the opposite (quotation) currency. The course is thus always gives one unit of base currency. For example, if we see the EUR / USD 1.3488 means that 1 euro is worth 1.3488 U.S. dollar. So if the currency pair exchange rate increases, the base currency strengthens and weakens the opposite. Eg. if EUR / USD from 1.3400 to strengthen 1.3470 and buy one euro more dollars (Euro U.S. dollar strengthened and weakened).Conversely, if the currency pair weakens as the base currency weakens and strengthens the opposite.
If you install any FX trading platform, you’ll actually 2 numbers. The first number is BID (bid) and the second number is ASK (demand).
We stay at the instance of the currency pair GBP USD, where we can see:
? BID price of 1.5131 is the bid price at which traders try to buy from you the British pound against the U.S. dollar.
? ASK price of 1.5136 is the demand price at which traders try to sell the British pound against U.S. dollar
What happens if we buy currency pair?
- when you buy GBP USD
- buy GBP and also
- sell USD
- when you sell GBP USD
- GBP and sell at the same time
- buy USD
SPREAD
The difference between the BID and ASK price is called the SPREAD . This is similar to the exchange office. Spread it is, generally speaking, profit of the bank or currency exchange or broker. The size of spread is directly proportional to the liquidity of the currency pair. The higher the liquidity, the lower the spread.
The most traded pairs such as EUR USD, USD JPY moves the spread usually 3 points. For other very liquid pairs EUR JPY, GBP USD, USD CHF is usually spread moves to 5 points. But for example in the currency pair GBP CHF can be spread is 10 points or more. Also this theory has its dark side. Tou are times when the market is great nervousness and expectations of large movements, for example, when announced some important news. In this case, may have spread quite a different value than we have said above – of course, will be higher. SPREAD is an important value in the decision making process of each investor and speculator – whether in terms of choosing a broker, and in selecting the currency pair.
Please note that as a speculator:
buy at ASK price and sell at the BID price!
Exactly opposite of the bank, broker or exchange.
PIP VALUE
When we talked about the amount of spread, we saw that the currency pair exchange rate is expressed as a decimal number with 4 decimal places. Currency pairs are increasing the minimum threshold – movement – a point or pip . If the bid price GBP USD moves from 1.5131 to 1.5132 just moves one pip. (That would be that there is also not an exception – some brokers will follow the numbers with 5 decimal numbers – but it does not change what we said).
To four decimal places to quote all currency pairs except the Japanese yen, JPY, “he is quoted in all the pairs to two decimal places and movement classes at one point with two decimal places is equivalent to the exchange rate to four decimal places.
The value of one pip – or PIP VALUE will vary slightly for different currency pairs and more vary by size of investment. The basis for calculating pip value of the volume traded currencies. One LOT is a standardized unit of volume, which represents the volume of currency worth 100,000. For all currency pairs, where the currency is quoted against the dollar (EUR / USD, GBP / USD – USD is always on second) at sizes invest a LOT pip is worth $ 10 ($ = USD). If the volume of currency was 10 000 (minilots called), then the value of 1 pip was $ 1 If the volume of currency was 1000 (so-called micro lot), then the value of 1 pip was $ 0.1.
The opposite of quoted pairs (USD / CHF, USD / JPY, USD / CAD – USD is always the first place) is the value of pips variable, but different order of magnitude from the previous example, so it may be of the order from $ 8 to $ 10 for a PIP for Standard one meter lot. EUR / GBP, then approximately $ 17 per pip. On our server will help PIP calculator that lets you easily calculate the pip value for any pair, such as where not appear USD (eg EUR JPY).
Example for the currency pair EUR / USD: as we said, so a value of 1 pip is $ 10 or $ 10 This means that if you earn the upside move 10 pips, so you receive 100 USD to your trading account (10×10 = 100).
Example trade or what it’s long and short?
Suppose we assume, for some reason, the strengthening of the EUR / USD and thus move up and want to earn it. So we decide to buy – go into a long position (or the so-called Long trade). So we enter the command, BUY “.
You buy at 1.3358 and a few hours later the price had grown to 1.3390. And you decide to end the trade.
The difference between 1.3358 and 1.3390 is 0.0032 or 32 pips. And as we know, as the currency pair EUR / USD, each pip value of $ 10 So our total profit per store is $ 320 (32 x 10) on 1 lot.
Another example
Now suppose that the EUR / USD will weaken and the price will go down, so we decide to enter into short positions (so-called Short trade ) and capitalize on the expected movement.EUR / USD is now trading at price 1.3522. So we enter the command, SELL. ”
Again, a few hours later, EUR has subsided up to 1.3418 and you close the position purchase price of EUR 1.3418.
The difference between 1.3522 and 1.3418 is 0.0104 or 104 pips. And as we know, the currency pair EUR / USD, each pip value of $ 10 So our total profit per store is $ 1,040 (104 x 10) for 1 standard lot.
On entry or exit from the store but you also need to calculate the spread between the bid / ask price. But later.
Slippage
It is another thing that needs to be careful in carrying out orders. Or slippage,, slip “occurs in the performance of STOP or LIMIT orders when a pending order becomes a market (Market) Order. Ie. When you place an order practically to buy GBP USD BUY STOP as the first 5147 and the price to your doputuje command and touches your price, at that moment becomes a Market Order and you will receive a command performance as the market, for example, 1.5149 – that is slippage.
MARGIN
For that, you can trade currency pairs, you must have an account with one of the brokers (the selection of a broker will pay a separate article), which will purchase the currency pair will bring down a deposit (guarantee) or MARGIN . This is closely related to the issue LEVERAGE - leverage that Forex trading is the very widespread. Leverage works just as in physics or mechanics. Or for little money a lot of music. So you do not need in any case have $ 100 000 in your account, you can trade, but you need only a fraction of the price (margin).
Basically, when you can stick 100:1 deposit (margin) $ 1,000 to control $ 100,000. And brokers offer leverage from 1:1 to 400:1. It is also important to keep in mind that a large lever relative can bring great improvements, but also big losses.
For minilots worth as $ 10,000 (or euro or other currencies) will stick to 100:1 will do business only on the deposit (margin) of $ 100
Access to individual brokers and MARGIN LEVERAGE is individual and therefore it is necessary to pay sufficient attention to the conditions offered.
MARGIN CALL
If the broker will have any reason to believe that your position is compromised and your losses are close to that margin, it will have a one- MARGIN CALL, or inserting additional cash account or the end position, to minimize your risks as well as his. If you do not even an option, your broker itself closes an open position.
In fact, the margin call good thing, since it protects not only brokers but also you. Some dealers are very emotionally involved in their business, so they are not able to think rationally.When it comes to margin calls, it protects dealers from major losses – it’s such an emergency brake.
Rollover
Or transfer. The spot market is usually the end of the workday at 21:59 (London Time – GMT).Any positions still open at this time are automatically transferred to the next business day ends back at 21:59. The transfer of positions is associated with interest rate traded currencies. Therefore, the broker will calculate the interest at the end of the day, close your position and reopens a new position almost simultaneously. For you is important if the currency pair in a buy or sell and what are the interest rates between two currencies.
The best example to show that:
- if you enter the instruction for the purchase of EUR JPY, so we know that interest rates in the EU are significantly higher than in Japan. Taking buy EUR and JPY sell. If we hold the position,, overnight “, and earn on the difference in interest rates and this difference will be credited to the account.
- if you enter the instruction for sale EUR JPY (ie, EUR and JPY sell buy) and we will hold the position,, overnight “, so the difference in interest rates and lose money this difference, we will be written off the account.
To assist the private trader are important and relevant information about the size of the spread, which is dependent on the liquidity of the currency pair. It is also important to realize the value of pips and adapt depending on the size of your investment. It is necessary to allow for a margin slippage. In contrast, information about the rollover is not essential for the actual trading, and therefore will suffice, though it will only register.
