Saturday, February 18, 2012

Forex Basics - Forex Trading Basics Part 2 Forex Trading For Absolute Newbie

FOREX Basics Part II
click here for part I

---FOREX Transactions---

There are 2 basic transactions in FOREX: BUY or SELL. Unlike selling something you already own a Sell means to go SHORT the currency expecting it to fall. A Buy means to LONG the currency expecting the price to fall. You simply close a position to exit it weather it's a buy or sell.

As previously stated in Part 1, one standard lot in FOREX is equal to 100,000 units of the base currency, 10,000 units if it's a mini, or 1,000 units if it's a micro. Some dealers offer the ability to trade in any unit size, down to as little as 1 unit.

So in essence when the trader buy a standard lot is controlling 100,000 units of the base currency.

---What are pips?---

Profit and loss is reflected in Pips in currency trading. A pip is the smallest price increment a currency can make. Also known as points. For example, 1 pip = 0.0001 for EUR/USD, or 0.01 for USD/JPY.

1 pip of a standard lot of EUR/USD represents approximately $10 USD. 1 pip of a mini lot represents approximately $1 USD. 1 pip in a micro represents approximately $0.10 (although this can vary depending on the actually size of the micro lot).

So if a trader places a long trade of the EUR/USD and the current price is 1.0700 and the price goes to 1.0815 what is the profit? The profit is ruffly $1150.00 (per standard lot), $115 (per mini lot), or $15 (per micro lot). Of course this is minus the spread.

---What is the spread?---

The spread is the premium the broker gets for the transaction and the difference between the sell quote and the buy quote. Usually for the EUR/USD the going rate is 3 pips or $30 USD per standard lot, $3 per mini lot but it depends on the broker and the currency pair.

More exotic pairs require a higher premium for various reasons such as liquidity and how fast the price moves. So basically your in the hole as a trader from the second you place your trade and don't forget market slippage.

---What is Slippage?---

The difference between the order price and the executed price, measured in pips. Slippage often occurs in fast moving and volatile markets, or where there is manual execution of trades. So just because you click buy or sell it does not mean that your order will get filled at exactly that price.

By Neal Vanderstelt
Forex Trader, Market Analyst, Trading System Designer
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