Most trading platforms calculate P&L of your open positions automatically - but it's useful to know where that calculation comes from. Here's an example:
You believe EUR is undervalued vs. USD
You want to buy EUR and sell USD
To buy 100k EUR = US $142,010
Required margin at 1% = US $1420
Sunday, February 17, 2008
Saturday, February 16, 2008
Learning Forex
Forex Quotes:
Reading a foreign exchange quote is simple if you remember two things:
When USD is the base currency and the quote goes up, that means USD has strengthened in value and the other currency has weakened. Rising quotes mean a US dollar can now buy more of the other currency than before.
The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). For these pairs, where USD is not the base currency, a rising quote means the US dollar is weakening and buys less of the other currency than before.
In other words, if a currency quote goes higher, the base currency is getting stronger. A lower quote means the base currency is weakening.
Cross currencies:
Currency pairs that don't involve USD at all are called cross currencies, but the premise is the same.
Bids , Asks:
Just like other markets, forex quotes consist of two sides, the bid and the ask:
The BID is the price at which you can SELL base currency.
The ASK is the price at which you can BUY base.
Pips:
For Japanese yen, pips refer to the second decimal point. This is the only exception among the major currencies.
Forex prices are often so liquid, they're quoted in tiny increments called pips, or "percentage in point". A pip refers to the fourth decimal point out, or 1/100th of 1%.
Reading a foreign exchange quote is simple if you remember two things:
- The first currency listed is the base currency
- The value of the base currency is always 1.
When USD is the base currency and the quote goes up, that means USD has strengthened in value and the other currency has weakened. Rising quotes mean a US dollar can now buy more of the other currency than before.
The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). For these pairs, where USD is not the base currency, a rising quote means the US dollar is weakening and buys less of the other currency than before.
In other words, if a currency quote goes higher, the base currency is getting stronger. A lower quote means the base currency is weakening.
Cross currencies:
Currency pairs that don't involve USD at all are called cross currencies, but the premise is the same.
Bids , Asks:
Just like other markets, forex quotes consist of two sides, the bid and the ask:
The BID is the price at which you can SELL base currency.
The ASK is the price at which you can BUY base.
Pips:
For Japanese yen, pips refer to the second decimal point. This is the only exception among the major currencies.
Forex prices are often so liquid, they're quoted in tiny increments called pips, or "percentage in point". A pip refers to the fourth decimal point out, or 1/100th of 1%.
What is forex???
"Forex" stands for foreign exchange; it's also known as FX. In a forex trade, you buy one currency while simultaneously selling another - that is, you're exchanging the sold currency for the one you're buying.
Currencies trade in pairs, like the Euro-US Dollar (EUR/USD) or US Dollar / Japanese Yen (USD/JPY). Unlike stocks or futures, there's no centralized exchange for forex. All transactions happen via phone or electronic network.
Daily turnover in the world's currencies comes from two sources:
With average daily turnover of US$3.2 trillion, forex is the largest market in the world.
A true 24-hour market from Sunday 5 PM ET to Friday 5 PM ET, forex trading begins in Sydney, and moves around the globe as the business day begins, first to Tokyo, London, and New York.
Unlike any other market, investors can respond immediately to currency fluctuations, whenever they occur - day or night.
Currencies trade in pairs, like the Euro-US Dollar (EUR/USD) or US Dollar / Japanese Yen (USD/JPY). Unlike stocks or futures, there's no centralized exchange for forex. All transactions happen via phone or electronic network.
Daily turnover in the world's currencies comes from two sources:
- Foreign trade (5%). Companies buy and sell products in foreign countries, plus convert profits from foreign sales into domestic currency.
- Speculation for profit (95%).
With average daily turnover of US$3.2 trillion, forex is the largest market in the world.
A true 24-hour market from Sunday 5 PM ET to Friday 5 PM ET, forex trading begins in Sydney, and moves around the globe as the business day begins, first to Tokyo, London, and New York.
Unlike any other market, investors can respond immediately to currency fluctuations, whenever they occur - day or night.
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