How To Start Trading The Forex Market Part 5
Below is a MRR and PLR article in category Finance -> subcategory Currency Trading.
How to Start Trading the Forex Market (Part 5)
Understanding Pips in Forex Trading
Pips Explained:
Currencies in the forex market are traded based on a price/point system known as pips. Each currency pair has a unique pip value.
Reading a Forex Quote:
When viewing a forex price quote, it might look like this:
EUR/USD 1.2210/13
- Buying EUR/USD: If you decide to buy EUR/USD, you're purchasing euros and selling US dollars. For example, buying 100,000 euros means you sell 122,130 US dollars.
- Selling EUR/USD: Conversely, if you sell EUR/USD, you're selling euros and buying US dollars. In this case, you buy 122,100 US dollars and sell 100,000 euros.
The difference between the bid and ask price is the spread, which is 3 pips in this example.
Base Currency Explanations:
Typically, the US dollar is the base currency in forex quotes. For major pairs like USD/JPY, USD/CHF, and USD/CAD, this is standard. A quote like USD/CHF 1.3000 means one US dollar equals 1.30 Swiss francs.
When the US dollar appreciates (e.g., USD/CHF rises to 1.3050), it indicates the dollar's increased value compared to the Swiss franc.
Exceptions:
There are exceptions where the US dollar is not the base currency, such as GBP, AUD, and EUR. A quote like EUR/USD 1.2080 signifies one euro equals 1.2080 US dollars. Here, a rising quote implies a weakening dollar since more dollars are required per euro.
Cross Currency Pairs:
Pairs not involving the US dollar are cross currencies. For example, EUR/JPY 134.50 indicates one euro equals 134.50 Japanese yen.
Buying and Selling in the Forex Market
Key Trading Rules:
1. Cut Losses and Let Profits Run: Every trader experiences losing trades. Successful traders cut losses early and let profitable trades continue.
2. Always Use a Stop Loss Order: Never trade without a stop loss order to manage potential losses. Determine your exit point before entering a trade to limit risks.
Entering and Exiting Trades:
- Going Long (Buy): Anticipate the currency will rise. For instance, buying EUR/USD means buying euros and selling dollars.
- Going Short (Sell): Expect the currency to decrease. Selling USD/JPY implies selling dollars and buying yen.
Profit and Loss Calculation
Example of a Sell Trade:
- Current USD/JPY = 107.50/107.54
- If you believe the USD is overvalued, you sell USD and buy JPY.
- Sell 1 lot of USD (100,000 USD) to buy JPY at the rate of 107.54.
- If USD/JPY falls to 106.50/106.54, buy back USD at the lower rate, realizing a profit of 100,000 yen.
Profit Calculation:
- Convert yen profit to USD: divide 100,000 yen by the new USD/JPY rate of 106.54.
- Total profit = $938.61 USD
This simplified guide emphasizes understanding forex trading concepts to help you make informed decisions. Whether buying or selling, remember to calculate risks and use tools like stop loss orders to protect your investments.
You can find the original non-AI version of this article here: How To Start Trading The Forex Market Part 5 .
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