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This is a good
place to start if you are new to the Forex Market. By making
comparisons to the Stock Market, I will attempt to explain what
you will be trading in the Forex Market
In the Stock
Market you are buying shares of stock
whereas in the Forex Market you are buying
currency in "Lots" also referred to as "Contracts".
Each Lot or Contract has a face value of $100,000 dollars.
Currencies are bought and sold in
pairs.
Each trade symbol has two currencies listed in the symbol.
The currency listed first is the base currency representing what
you are buying or selling. The second currency symbol is how
much your paying for it when converted to that currency
For Example:
|
Symbol |
What it Represents |
|
USD/CHF |
Cost of 1 US Dollar
in Swiss Francs. |
|
USD/JPY |
Cost of 1 US Dollar
in Japanese Yens. |
|
EUR/USD |
Cost of 1 Euro
Dollar in US Dollars. |
|
GBP/USD |
Cost of 1 British
Pound in US Dollars |
The
Forex Market has a Bid and Ask Price, similar to that of the
Stock Market. Therefore, assume the
following using the symbol for the Euro Dollar vs. the US Dollar
Size = Number of "Lots" or
"Contacts" being offered or sold.
1 Lot = $100,000
2 Lots = $200,000
3 Lots = $300,000
Bid = The price you can sell at
Ask = The price you can buy at
This means:
I can buy 1 lot
of the Euro for $120,810 US Dollars
or
I can sell 1 lot of the Euro for $120,800 US Dollars
Do not let those
numbers scare you. You don't actually have to come up with that
amount, but we will get into that further down the road.
In the stock market
a tick represents movement in the price. In the Forex Market we
call it a "Pip". You can make money by going Long on a position
or Short.
In other
words:
If I buy 1 Lot of the EUR/USD, I just took a Long
position because I think the price will go up. When the
price goes up I sell my 1 lot for a price higher than what I
paid.
If I sell 1 Lot
of the EUR/USD that I do not own yet, I just took a
Short position because I think the price will go
down. When the price goes down I buy 1 Lot at a lower price
than what I sold at.
Now lets talk
dollars and cents. How much money are you making with each Pip?
A pip is the smallest measurement of movement in the Forex
Market. It's value will vary with each different currency pair.
You have two options now.
-
Go to the
glossary for the
pip calculation formula
-
Look at the
chart below for the approximate amounts on major currency
pairs
|
Symbol |
|
Value of Each Pip in either direction /lot
|
| |
|
x1 |
x2 |
x3 |
x4 |
x5 |
| EUR/USD |
= |
$10.00 |
$20.00 |
$30.00 |
$40.00 |
$50.00 |
| USD/CHF |
= |
$7.87 |
$15.74 |
$23.61 |
$31.48 |
$39.35 |
| USD/JPY |
= |
$9.17 |
$18.34 |
$27.51 |
$36.68 |
$45.85 |
| GBP/USD |
= |
$10.00 |
$20.00 |
$30.00 |
$40.00 |
$50.00 |
| AUD/USD |
= |
$10.00 |
$20.00 |
$30.00 |
$40.00 |
$50.00 |
| USD/CAD |
= |
$7.42 |
$14.84 |
$22.26 |
$29.68 |
$37.13 |
| EUR/GBP |
= |
$11.82 |
$23.64 |
$35.46 |
$47.28 |
$59.10 |
| NZD/USD |
= |
$10.00 |
$20.00 |
$30.00 |
$40.00 |
$50.00 |
| GBP/JPY |
= |
$5.02 |
$10.04 |
$15.06 |
$20.08 |
$25.10 |
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These pip values were
calculated based on the foreign exchange rates on
June 24, 2005 at 12:58pm eastern standard time |
So if I buy 5 lots
of the EUR/USD at 1.2084 then sell all 5 lots at 1.2104 I would
have made $1000.00 on that trade. Not a bad trade.
I would imagine your still asking
yourself "How on Earth can I afford to buy 1 lot of currency
of $100.000?"
Its called Leverage or Margin. For every $1.00 you put in, we
will match it with $50.00, (50:1 Leverage). So an initial
deposit of $10,000 allows you to trade $500,000 of currencies.
And, NO...we will not let you trade to the point of having to be
faced with a margin call. We have safe guards built into the
system that will prevent you from loosing.
Is it really that simple?
Yes...PROVIDED you understand the
risks! For a better understanding of the risks associated with
trading in the Forex Market go to the
Pros and Cons page.
Disclaimer: Trading currencies on the foreign exchange is
not for everyone and carries a high risk level. The possibility
exists that you could lose some or all of your deposited funds.
Consider carefully your monetary objectives, level of experience
and risk tolerance.
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