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The word FOREX is derived from Foreign Exchange and is the largest financial market in the world. Unlike many markets the FX market is open 24 hours a day and has an estimate $ 1.2 Trillion in turnover every day. This tremendous turnover is more than the turnover of all markets wordls' stock in any day. This tends to lead to a very liquid market and thus a desirable market to trade. Unlike many other securities (any financial instrument that can be traded) the FX market has a fixed exchange rate. It is primarily traded through banks, brokers, dealers, financial institutions and individuals. Trades are executed through phone and increasingly through the Internet. It is only in recent years that small investors have been able to gain access to this market. Previously, large amounts of deposits required prevented the smaller investors. With the advent of the Internet and growing competition is now easily the reach of most investors. You will often hear the Interbank discussed in FX terminology. This, originally, as the name implies was simply banks and institutions great exchange of information on the current rate at which their clients or whether they were willing to buy or sell a currency. INTER meaning between and Bank meaning deposit taking institutions usually consisting of banks, large institution, brokers or even the government. The market has evolved to the point that now that the Interbank now means no one is willing to buy or sell a currency. It could be two individuals or your offer local travel agent to exchange Euros for U.S. Dollars. You will find however that most brokers and banks use centralized feeds to insure reliability of quote. Quote of Bid (buy) and offer (sell) are all reliable sources. These quotes are normally made up of 300 up or large institutions. This ensures that if we put an end to their name, institutions have placed the order is able to fulfill the order. Now, although we have spoken about orders being fulfilled, it is estimated that between 70% -90% of the market exchange is speculative. In other words, the person or institution that bought or sold the currency has no intention of actually taking delivery of the currency. Instead, they were only speculate on the movement of that particular currency. Source: Bank of International Settlements http://www.bis.org Extract From The Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity Currency19891992199519982001 U.S. Dollar9082.083.387.390.4 Euro …. 37.6 Japanese Yen2723.424.120.222.7 Pound Franc108.47.37.16.1 Sterling1513.69.411.013.2 Swiss As you can see in the table above, over 90% of all currencies are traded against the U.S. dollar. The next four most-traded currencies are the euro (EUR), Japanese Yen (JPY) Pound Sterling (GBP) and Swiss Franc (CHF). Currencies are traded in pairs and exchanged one for the other when traded, the rate in which they are exchanged is called the exchange rate. These four currencies against the U.S. dollar make up the majority of the market and are called major currencies or the majors. Market Mechanics So now we know that the foreign exchange market is the largest in the world and that your broker or institution that you are dealing with a collection of quotations a centralized feed or individual, including quotes of interchange fees. As these quotes are made. Well, as mentioned previously currencies are traded in pairs and are assigned to each symbol. For the Japanese yen is JPY, for Sterling is GBP, for Euro it is EUR and the Swiss Frank it is CHF. Thus, EUR / USD would be Euro-Dollar pair. GBP / USD would be pounds-Dollar pair and USD / CHF would be Dollar Swiss Franc pair and so on. You will always see the dollar first, with few exceptions, such as sterling, Eurodollar, and Australia Dollar New Zealand Dollar. The first currency quoted is called the base currency. Take a look below for some examples. Currency Symbol Currency Pair EUR / USDEuro / U.S. Dollar GBP / USDPounds Sterling / U.S. Dollar USD / JPYUS Dollar / Japanese Yen USD / CHFUS Dollar / Swiss Franc USD / CADUS Dollar / Canadian Dollar AUD / USDAustralian Dollar / U.S. Dollar NZD / USDNew Zealand Dollar / U.S. Dollar When you see FX quotes you will actually see two numbers. The first number is called the bid and the second number is called the offer (sometimes called the ASK). If we use the EUR / USD as an example, you might see 0.9950/0.9955 the first number 0.9950 is the price of sale is the price traders are willing to buy Euros against the dollar USD. The second number 0.9955 is the offer price and the price traders are willing to sell the euro against the U.S. dollar. These quotes are sometimes abbreviated to the last two digits of the currency as 50/55. Each broker has its own convention and some will quote the full number and others will show only the last two. You will also notice that there is a difference between the offer offer price and what is called the spread. For the four major currencies the spread is normally 5 give or take a PIP (I'll explain later pips) exercise from conventions of symbols and using our earlier citation of 0.9950 million offer, which means that 1 euro = $ 0.9950 U.S.. In another example, if it was used the USD / CAD 1.4500 that means that U.S. $ 1 = 1.4500 Canadian Dollars. The most common increment of currencies is the PIP. If the EUR / USD moves 0,9550-0,9551, which is a Pip. The seed is the last decimal place of the quotation. The PIP or point, it is often referred to as the context is how we will measure our profit or loss. As each currency has its own value, it is necessary to calculate the value of a seed for that particular currency. We also want a constant, suppose we convert everything to U.S. Dollars. Currency where the dollar is quoted at U.S. calculation of the first would be as follows. Example JPY 116.73 (notice the JPY only goes to two decimal places, most other currencies have four decimal places) in the case of JPY 1 pip would be 01 then USD / JPY: (.01 divided by exchange rate = pip value) for .01/116.73 = 0.0000856 seems that a large number, but then we will discuss lot (contract) size. USD / CHF: (.0001 divided by exchange rate = pip value) for .0001/1.4840 = 0.0000673 USD / CAD: (.0001 divided by the value of the exchange rate = pip) so .0001/1.5223 = 0.0001522 In the event that the U.S. dollar is not quoted first and we get the value of the U.S. dollar we have to add one more step. EUR / USD: (0.0001 divided by exchange rate = pip value) for .0001/0.9887 = EUR 0.0001011 but we want to return for U.S. dollars to add up another calculation, which is just € x exchange rate so 0.0001011 X 0.9887 = 0.0000999 when rounded up it would be 0.0001. GBP / USD: (0.0001 divided by exchange rate = pip value) to 0.0001/1.5506 = 0.0000644 GBP, but we want to go back to U.S. Dollars so add another calculation that is just GBP X Exchange rate so 0.0000644 X 1.5506 = 0.0000998 when rounded up it would be 0.0001. At this point you may be rolling your eyes back and thinking I really need all this work and the answer is no. Almost all the brokers you will deal with the will to work it all for you. They may have agreements slightly different, but it's all done automatically. It is good however for you to know how they work out. In the next section we will discuss how these seemingly insignificant amounts can add up. More information about the market mechanics Spot Forex is traditionally traded in lots also referred to as contracts. The standard size for a lot is $ 100,000. In recent years, a mini lot size has been introduced of $ 10,000 and this may change again in future years. As mentioned the previous page currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these small increments is desirable to trade large quantities of a particular currency in order to see any profit or loss. We shall cover leverage later but for now, let's assume that we will be using $ 100,000 lot size. We will now recalculate some examples to see how it affects the pip value. USD / JPY at an exchange rate of 116.73 (.01/116.73) x $ 100,000 = $ 8.56 per pip USD / CHF in exchange rate of 1.4840 (0.0001/1.4840) X $ 100,000 = $ 6.73 per pip Where the U.S. dollar is not quoted first the formula is slightly different. EUR / USD an exchange rate of 0.9887 (0.0001 / 0.9887) x 100,000 = EUR 10.11 million to return to U.S. Dollars we add a further EUR 10.11 X Exchange rate which looks EUR 10.11 X 0.9887 = $ 9.9957 rounded up will be $ 10 per pip. GBP / USD at an exchange rate of 1.5506 (0.0001/1.5506) X GBP 100,000 = 6.44 for back to U.S. Dollars we add a further GBP 6.44 X Exchange rate which looks GBP 6.44 X 1.5506 = $ 9.9858864 rounded up will be $ 10 per pip. As we said earlier your broker may have a different convention to calculate the seed value in relation to lot size but however they do that they will be able to tell you seed value for the currency you are trading is at that particular moment. Remember that as the market so the pip value depending on what currency trade you. So now we know how to calculate pip value lets take a look at how you work out your profit or loss. Suppose you want to buy and sell U.S. Dollar Yen Japanese. The rate you are quoted is 116.70/116.75 because you are buying the U.S. you will be working to 116.75, the rate at which traders are willing to sell. So you buy 1 lot of $ 100,000 at 116.75. A few hours later, the price moves to 116.95 and you decide to close the trade. You request a new quote and are quoted 116.95/117.00 as it is now close to trade and initially bought to enter the trade you now sell
FOREX TRADING – Scalping
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