Exclusive And Best Forex Pips Strategy

Glossary

What Is A Forex Pip?

When you start to look around forex websites online, you will soon see references to the forex pip. Your gains and losses will be measured in pips. Something else that is measured in pips is the spread, the difference between the bid and ask prices which is the main cost of forex trading and how the brokers make their money. So it is clearly very important to understand what is a forex pip.

The word is an acronym standing for percentage in point (or sometimes, price interest point). It is the smallest increment of changes in values. It allows us to measure a rise or fall in currency values in percentage terms instead of in dollars and cents.

Why do we need to talk in pips? The reason for this is simple. In the foreign exchange market there is no world currency in which to express values. The US dollar may be the most commonly traded currency but it is not involved in all trades. If you are trading cross rates, i.e. two other currencies such as EUR/GBP or any other combination that does not involve USD, it would not make any sense at all to express your gains and losses in terms of US dollars. Instead, we need something that is a small percentage of the value of whatever currencies we are dealing with.

This means that the monetary value of a pip varies according to the currency.

Most currencies are quoted to four decimal points. For example you might see the bid price for EUR/USD quoted at 1.3642 and ask price 1.3644. The difference (the spread) is 0.0002 or 2 pips. Here a pip is 0.01% of a lot.

So if the lot size was $100,000, one pip would be worth $10. For a lot size of $10,000, one pip would be $1.

That is the value of pips when the US dollar is the quote currency, i.e. XXX/USD. But when the quote currency is different, one pip is usually 10 units of that currency (e.g. 10 euros or 10 pounds). Or if your lot size is 10,000 units, one pip is 1 unit (1 euro or 1 pound).

The exception is the Japanese yen which has a much lower unit value than most currencies (you get a lot of yen to the dollar). Because of this, the yen is only quoted to the second decimal point. You might see a price USD/JPY 110.15. In this case one pip is 0.01 or 1% but in yen, not dollars. So the pip value is JPY 1000 which at that price would be worth US $11.015.

These differences can be confusing when you are just starting out. So it is better for beginners to trade consistently with just one currency pair.

If you are trading one pair regularly every day you will soon get used to how much a pip means in terms of your actual gains and losses in your account. You will know how much one pip is worth in dollars or in your own currency.

But when you are trading several different currency pairs, you have to deal with pips of different value. If you get confused, you could be taking greater risks than you planned or closing trades with less profit than you thought. It is much easier to deal with only one pair at first until you have a sound understanding of trading practices and forex pip values.

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Thursday, June 18th, 2009 Glossary, Introduction No Comments

Foreign Exchange Market: Simple Glossary

The foreign exchange market has many factors that make it unique. It has been described as the closest to pure competition that can exist, even though the international banks attempt to control and manipulate it. But what makes it so special, and why might you consider that you are more likely to be able to make money on the forex market than other forms of investment trading such as stock trading?

Trading Volume

The amount of money traded on the forex market daily is immense. The average daily turnover across the world is almost $4 trillion, according to a survey by the Bank For International Settlements in December 2007. The biggest trading center is London, followed by New York and Tokyo. However, the US dollar is the most traded currency.

Liquidity

The liquidity of a commodity is its ease of conversion to cash without impacting the value. Money is already money, so it is more liquid than any other asset. This means it is very easy to trade.

A Global Market

Forex is not traded in one place but all over the world. This means that, while of course it is affected by national events in the biggest financial powers, the effects are balanced out. Currencies do not have absolute value: a currency’s value can only be measured in comparison with another currency. So if one currency falls in value, another will rise.

Compare this with the stock exchange where it is possible for the value of every company’s stock to drop at the same time. All you can do in a major stock market crash is to withdraw your investment. But in forex, you can switch from the falling currency to the rising currency and still make money.

A 24 Hour Market

Currencies can be traded in different parts of the world 24 hours a day, five days a week. The foreign exchange market opens at 22.00 hours UTC Sunday in Sydney, Australia, where it is Monday morning, and closes at 22.00 hours UTC Friday in New York, where it is Friday afternoon. So whatever time of day or night you like to trade, you will have the opportunity, unless your only free time is on weekends.

Leverage

Leverage is where a small amount of something can be used to control a larger amount. In forex trading, leverage is related to the practice of trading on margin. You invest a small amount in your brokerage account and your broker lends you the rest, so that you do not have to put up the whole value of your position.

Forex trading offers more leverage than stock or futures trading. You may be able to control up to 200 times your account balance, depending on the broker. Higher leverage gives you the chance of bigger profits, but of course, there is also the risk of bigger losses. You will not necessarily want to take the maximum leverage on the foreign exchange market, especially in the beginning.

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Monday, June 8th, 2009 Glossary No Comments