Sunday, March 4, 2012

How to trade currency?

     The foreign exchange market, often referred to as forex, is the market for the various currencies of the world. It is a market which, at its core, is rooted in global trade. Goods and services are exchanged 24 hours a day all over the world. Those transactions done across national borders require payments in non-domestic currencies.      
      For example, a US company purchases widgets from a Mexican company. To do the transaction, one of two things is going to happen. The US firm may, depending on the contract terms, make payment in Mexican Pesos. That would require a conversion of Dollars in to Pesos to make payment. Alternately, the payment could be made in Dollars, in which case the Mexican company would then exchange the Dollars for Pesos on their end. Either way, there is going to be some transaction which takes Dollars and swaps them for Pesos.
    That is where the forex market comes in. Transactions like that take place all the time. The market maintains a rate of exchange between the US Dollar and the Mexican Peso (and between and amongst all other world currencies) to facilitate that activity. Consider the amount of global trade which takes place and you can see why the forex market is the biggest in the world, dwarfing all others. Literally trillions of dollars worth of forex transactions take place each and every day.
          How is the Forex Market Different?
There are some significant differences between the forex market and others like the stock market. While it may be the feeling that a good trader should be able to handle any market, the fact of the matter is that some structural differences in forex can require a different trading approach.
For most stock traders, the first difference they will notice between the forex market and equities is timeframe. Although the hours of stock trading have been expanding in recent years, the forex market is still the only one which can truly be viewed as 24-hour. There is ready forex trading activity in all time zones during the week, and sometimes even on the weekends as well. Other markets may in fact transact 24-hours, but the volume outside their primary trading day is thin and inconsistent.
           No Exchanges
The lack of an exchange is probably the next big thing that sticks out as being different in forex. While it is true that there is exchange-based forex trading in the form of futures, the primary trading takes place over-the-counter via the spot market. There is no NYSE of forex.
On the largest scale, forex transactions are done in what is referred to as the inter-bank market. That literally means banks trading with each other on behalf of their customers. Larger speculators also operate in the inter-bank market where they can execute multi-million dollar trades with ease. Individual traders, who generally trade in much smaller sizes, primarily do so through brokers and dealers.
This is something which can trouble stock traders. There is no central location for price data, and no real volume information is attainable. Since volume is an often reported figure in the stock market, the lack of it in spot forex trading is something which takes a bit of getting used to for those making the switch.
Transaction Processing
Also, the lack of an exchange means a difference in how trading is actually done. In the stock market an order is submitted to a broker who facilitates the trade with another broker/dealer (over-the-counter) or through an exchange. In spot forex much of the trading done by individuals is actually executed directly with their broker/dealer. That means the broker takes the other side of the trade. This is not always the case, but is the most common approach.
            Transaction Costs
The lack of an exchange and the direct trade with the broker creates another difference between stock and forex trading. In the stock market brokers will generally charge a commission for each buy and sell transaction you do. In forex, though, most brokers do not charge any commissions. Since they are taking the other side of all the customer trades, they profit by making the spread between the bid and offer prices.
Some traders do not like the structure of the spot forex market. They are not comfortable with their broker being on the other side of their trades as they feel it presents a type of conflict of interest. They also question the safety of their funds and the lack of overall regulation. There are some worthwhile concerns, certainly, but the fact of the matter is that the majority of forex brokers are very reliable and ethical. Those that are not don't stay in business very long.
Margin Trading
The forex market is a 100% margin-based market. This is a familiar thing for those used to trading futures.
In fact, spot forex trading is essentially trading a 2-day forward (futures) contract. You do not take actual possession of any currency, but rather have a theoretical agreement to do so in the future. That puts you in a position of benefiting from prices changes. For that your broker requires a deposit on your trades to provide surety against any losses you may incur. How much of a deposit can vary. Some brokers will asked for as little as 1/2%. That is fairly aggressive, though. Expect 1%-2% on the value of the position in most cases.
Now, unlike the stock market, margin trading does not mean margin loans. Your broker will not be lending you money to buy securities (at least not the way a stock broker does). As such, there is no margin interest charged. In fact, since you are the one putting money on deposit with your broker, you may earn interest in your margin funds.
          Interest Rate Carry (Rollover)
When trading forex, one is essentially borrowing one currency, converting it in to another, and depositing it. This is all done on an overnight basis, so the trader is paying the overnight interest rate on the borrowed currency and at the same time earning the overnight rate on the currency being held. This means the trader is either paying out or receiving interest on their position, depending on whether the interest rate differential is for or against them.
This is commonly handled is what is referred to as a rollover. Spot forex trades are done on a trading day basis, and as such are technically closed out at the end of each day. If you are holding your position longer than that, your broker rolls you forward in to a new position for the next trading day. This is generally done transparently, but it does mean that at the end of each day you will either pay or receive the interest differential on your position.
The type of trader you are and the way your broker handles rollover will be the deciding factors in determining whether the interest rate differentials are an important concern for you. Some brokers will not apply the day's interest differential value on positions closed out during the trading day. By that I mean if you were to enter a position at 10am and exit at 2pm, no interest would come in to play. If you were to open a position on Monday and close it on Tuesday, though, you would have the interest for Monday applied (the full day regardless of when you entered the position), but nothing for Tuesday. (Note: There is at least one broker who calculates interest on a continuous basis, so you will always make or pay the interest differential on all positions, no matter when you put them on or took them off).
It should also be noted that although some folks will claim there is no rollover in forex futures, the interest rate spread is definitely factored in. You can see this when comparing the futures prices with the spot market rates. As the futures contracts approach their delivery date their prices will converge with the spot rate so that the holders will pay or receive the differential just as if they had been in a spot position.
Fixed income traders know that central bankers, like the Federal Reserve, are active in the markets, buying and selling securities to influence prices, and thereby interest rates. This is not something which happens in stocks, but it does in the forex markets. This is known as intervention. It happens when a central bank or other national monetary authority buys or sells currency in the market with the objective of influencing exchange rates.
Intervention is most often seen at times when exchange rates get a bit out of hand, either falling or rising too rapidly. At those times, central banks may step in to try to nullify the trend. Sometimes it works. Sometimes not.
The US has traditionally taken a hands-off approach when it comes to the value of the Dollar, preferring to allow the markets to do their thing. Others are not quite so willing to let speculators determine their currency's value. The Bank of Japan has the most active track record in that regard.
John Forman is the author of The Essentials of Trading, and a professional market analyst and strategist with 20 years of experience trading stocks, futures, forex, and pretty much anything else traded by individuals. If you would like to learn more about how you can identify price targets in this fashion, you'll want to take a look at the video John has prepared on the subject. Click here for more information.
You can find more how-to and educational articles to improve your investing and trading each day on

Currency Trading Basics

The foreign exchange market is the term given to the worldwide financial market which is both decentralized and over-the-counter, which specializes in trading back and forth between different types of currencies. This market is also known as the Forex market. In recent times, both investors and traders located all around the world have begun to notice and recognize the foreign exchange market as an area of interest, which is speculated to contain opportunity.
However, before considering treading these waters, it is important to first understand how transactions are conducted within the foreign exchange market. It is also necessary to first explain what the basics are of trading foreign currency. Failure to fully and completely understand this art prior to journeying off into this market would render a person lost in a matter of minutes, just where they would never expect it. Thus, this article has been presented, intending to explain currency trading basics thoroughly.
What is traded within the foreign exchange market? 
The one instrument that foreign exchange market investors and traders constantly utilize are currency pairs. This is a term used to describe what the rate of exchange for one currency is over another currency. In the whole of the market, the following are the currency pairs that of which are traded most often:

  • EUR / USD – Euro;
  • GBP / USD – Pound;
  • USD / CAD – Canadian Dollar;
  • USD / JPY – Yen;
  • USD / CHF – Swiss Franc; and
  • AUD / USD – Aussie
In the whole of the foreign exchange market, the previously listed currency pairs generate up to 85% of the volume.
If a trader ends up going long or goes ahead and buys the Euro, he or she is also, at the same time, buying Euro and selling the United States Dollar. In the event that this same trader ends up going short or goes ahead and buys the Aussie, he or she will also, at the same time, be selling the Aussie and purchasing the United States Dollar.
In each currency pair, the former currency is the base currency, where the latter currency is typically in reference to the quote or the counter currency. Each pair is generally expressed in units of the quote or the counter currency that of which are needed in order to receive a single unit of the base currency.
To illustrate, if the quote or the price of a EUR / USD currency pair is 1.2545, this would mean that one would require 1.2545 United States Dollars in order to receive a single Euro.
Bid / Ask Spread
It is common for any currency pair to be quoted with both a bid and an ask price. The former, which is always a lower price than the ask, is the price at which a broker is ready and willing to buy, which is the price at which the trader should sell. The ask price, on the other hand, is the price at which the broker is ready and willing to sell, meaning the trader should jump at that price and buy.
To illustrate, if the following pair were provided as such:
EUR / USD 1.2545/48 OR 1.2545/8 
Then the bidding price is set for 1.2545 with the ask price set to 1.2548.

The minimum incremental move that of which is made possible by a currency pair is otherwise known as a pip, which simply stands for price interest point. For example, a move in the EUR / USD currency pair from 1.2545 to 1.2560 would be equivalent to 15 pips, whereas a move in the USD / JPY currency pair from 112.05 to 113.05 would be equivalent to 105 pips.

Margin Trading (Leverage) 
In other financial markets, it would generally be required to have the full deposit of the amount that of which is traded. However, in the foreign exchange market, all that of which is required would be a margin deposit, with the remainder being granted by the broker.

Some brokers will provide leverage that will rise up to 400:1. In essence, this means only 1/400 in balance is required to open a position, or .25%. The majority of brokers, however, will only offer 100:1, meaning 1% is required in balance in order to open a position.
A typical lot size within the foreign exchange market is roughly $100,000 United States Dollars.
When a trader would desire obtaining a long lot within the EUR / USD currency pair, where the leverage amounts to about 100:1, in order to open such a position would require $1,000 United States Dollars in balance, or 1%.
It is not recommended, of course, to open such a position when the trading balance retains such limited funds. In the event that the trade should go against the trader, the broker will close the position. This will bring the focus onto the next term.
Margin Call 
In the event that the balance of a trading account should end up falling below the maintenance margin, which is the capital required to open a position (1% in a 100:1 leverage, 2% in a 50:1 leverage, so on and so forth), a margin call will occur. At the moment that this margin call occurs, the broker will either sell off all of the trades or buy back in the event of short positions. This will theoretically leave the trader with the maintenance margin.

Margin calls generally occur in the event that money management is not applied in a proper manner.
How are the mechanics of a foreign exchange market trade? 
To illustrate an example, after extensive analysis, a trader concludes it is likely for the British pound to rise in price. This trader decides it is worth going long and risking 30 pips, intending to wind up being rewarded with 60 pips. In the event that the market goes against this trader’s decision, they will end up losing 30 pips. However, should the market go as intended, they will gain 60 pips.

The British pound has a quote that is precisely 1.8524/27, 4 pips spread. The trader in question will go long at 1.8530, or ask. Once the market either reaches the target or the risk point, the trader will need to sell it at the bid price. To make 40 pips, the profit level would need to be 1.8590. Should the target be hit by the market, then the market has run 64 pips. Otherwise, the market will have run 30 against.
As one may have gathered at this point, it is generally a very good idea in order to fully understand the basics of currency trading, from the very basic concepts to the more complex issues, before deciding to tread the waters of the foreign exchange market. Make sure every single aspect of the subject is mastered, including trading psychology, trade and risk management, as well as everything else, prior to making the decision to opening a live trading account. Best of luck.

5 Tips for Better Technical Analysis When Trading Currencies

The foreign exchange market is a means of investing in currencies by purchasing them and then converting them into other currencies, taking advantage of the fluctuations in exchange rates to tap into the wealth of developing nations. This is predicated on the premise that stable currencies, such as the dollar or the euro, tend to remain steady while developing currencies become more valuable as their country becomes more prosperous and begins importing goods and services that they need to pay for in dollars and euros.

It is a famously complex and dynamic market that can make money when there is a depression and lose money during the biggest of booms. It’s also inherently risky and high volume, since money usually does not gain or lose value very quickly, and so the investments must be large. They also need to be sold quickly when specific conditions are met, since most foreign exchange traders make their money by preying on very slight upticks in value. It is also possible for a currency to become worthless in a matter of hours should there be an environmental disaster or military coup. For these reasons, it is invaluable to have good technical analysis in regards to how a particular currency is doing in order to maximize value and minimize loss. There are five main ways that this is done.

5. Watch the news.

It may seem painfully obvious, but many beginning investors fail to understand the political and social realities of the countries whose currencies they have decided to purchase. It is easy for greedy dictators or corrupt bankers to manipulate the value of the currency used in a small nation, and such deception is usually readily apparent, yet even major banks sometimes get suckered in by a deal which is too good to be true.
Currencies may also be slow to move in times of political uncertainty as speculators wait for the price to go down and current holders try to keep the price up. It is important when engaging in foreign exchange trading to always keep both feet firmly planted on the ground and never be afraid to dump a currency when the nation who owns it appears to be on the road to disaster. Remember also that this can happen to any nation, even modern and well-developed ones, as was proven by Iceland in 2008.
4. Study the culture and economic realities of any nation you invest in.
In large economies like the United States and China, the value of the local currency is usually dictated by a vast array of products and forces which are too complex even for the national governments to fully understand. However, smaller nations tend to have very specialized economies which are very heavily influenced by a small number of sectors. For example, many Caribbean nations are almost entirely dependent on tourism for their economic well being.
This means that natural disasters, crime and disease will have a much more devastating impact on their economies than those of countries who are more dependent on mining or farming for their income. The same is also true of large countries. For decades, the low rates of interest in Japan made the yen very attractive to American foreign exchange traders, since they could take out large loans in yen, convert them into dollars, and then pay off the debt through favorable exchange rates.
For many companies, it was almost like printing money. But when the American economy began to deflate due to the collapse of the housing bubble, those very same investors found that they now owed large amounts of yen and did not have enough dollars to pay for it. The American economy was heavily dependent on mortgage backed securities and other financial products tied up in the housing market, which came down hard on those not wise enough to ask questions about the integrity of the American economy.
3. Watch the PIPs and look for trends.
The term “PIP stands for “Percentage In Point” and it is a means of watching how currencies relate to one another. Most currencies are traded all the way out to four decimal points, the major exception being the yen that is traded to only two decimal points because it is worth approximately 1/100th that of the dollar or the euro. A “PIP” is defined to be one unit of change of the last decimal point in a currency’s value. For example, if the exchange rate of the dollar to the euro goes from 1.3000 to 1.3010.
Then the exchange rate has seen an increase of ten PIPs. In general, monitoring the PIPs is similar to monitoring the value of a stock, and the gain and loss in PIPs is widely available as a tracking service from many online resources, and most virtual trading software works by constantly monitoring the way in which PIPs change in currency trading markets worldwide. Just as the price of a stock tends to follow general trends over time so do the PIPs, and it is possible even for a novice to observe large trends.
It is also possible to observe more refined trends over smaller periods of change, but this is limited to specific factors unique to specific currencies. Still, examining and exploiting trends is the best way to invest in the foreign exchange market over the long term, since it allows one’s investments to rise with the growth of entire economies.
2. Subscribe to trade publications and read the blogs.
To really make money in the foreign exchange market, one needs to understand what is going on at all times. Today’s global economy is too big for any one person to comprehend, but nonetheless one bad economy eventually wreaks havoc well beyond its borders. The starkest example is how the bad economy of Greece was threatening to take down the euro in the spring of 2010, but there are innumerable smaller examples.
It is therefore essential for a currency trader to know in detail what is going on with the currencies they have invested in. It’s dangerous folly to simply invest in what is currently a strong currency and then sit back and wait for it to mature. Trade publications and blogs will detail all sorts of useful and relevant information that non-investors are highly unlikely to care about.
Every day, an investor should know what the central bank is doing, what sort of interest rates are being offered by local private banks, and if there is any pending legislation which might open up or close off currency. Any currency is subject to constant “wiggling” in value as market realities try to determine what it is really worth. Investors who keep an eye on that fluctuation can often profit immensely by buying and selling a currency on the same day.
1. Talk to other traders.
In the end, the foreign exchange markets are run by humans, staffed by humans, and filled with human decisions and human flaws. Therefore the only way to really get what’s going on with the market is talk to other people who are investing in it and seeing what they think. While it is important to note that everyone has a vested interest in keeping some things secret and other things widespread, constantly talking to others to find out their opinions is always invaluable.
While individual people make mistakes, usually the market overall is able to anticipate major problems and avoid obvious pitfalls. Listening to individuals also gives investors an opportunity to hear different and often important points of view. Those few who rang the warning bells about the American debt crisis made millions of dollars when they moved their currency into yen or euros, as the American dollar quickly became worth less than even it’s Canadian counterpart. Talking with other investors also gives one the opportunity to have their mistakes corrected. Hindsight is always 20/20, but often it’s possible for someone to be able to spot an error very easily simply because they did not make it themselves. Fortunes have been won or lost simply because someone took or did not take a bit of advice, and often all it takes is a single overlooked currency report to make or break a fortune.
The foreign exchange market is even more complex than most stock markets and should not be entered in to lightly, even by persons willing to take a significant loss. While it is certainly possible to make thousands or even millions in a few smart trades, all of that income can be wiped out by a bad investment or a late sell. The foreign exchange market also has a network of brokers, software and other intermediaries that are inherent and necessary for buying and selling currency across international borders. Currencies often trade early in the morning or late at night when compared to local times in America, meaning that foreign exchange investors often have to anticipate what is going to happen a whole world away. Still, it is a fair market that offers substantial rewards to those willing to put in the effort.

Choosing a Broker and Opening an Account

You’ve probably seen many advertisements for Forex brokers as you’ve investigated currency trading online. Some of their gimmicks range from informative to ridiculous; however, these advertisements serve a purpose, as you will eventually need to sort through them and open an account with a reputable Forex broker in order to start trading.

Generally speaking, a Forex broker will help execute currency trades for you in a similar manner to a stockbroker. You will decide which currency pairs you would like to purchase or sell and then conduct the transaction through the broker. Brokers earn money by charging a commission or a fee for their services and/or through the bid/ask spread.
In order not to feel overwhelmed by the number of Forex brokers available on the internet, you will need to do a fair amount of research. We intend to help you establish criteria for your decisions and what you should expect from a broker. Once you pick a broker, you can open an account and start trading!

Is Online Trading for You?

Forex trading is typically not conducted in an off track betting-like venue where you walk up to a cashier and exchange money underneath a plate of bulletproof glass. Instead, the majority of transactions are carried out online through a broker’s trading platform.
The question you need to ask yourself is whether you feel comfortable trading currency online. If not, there are brokers who will execute trades for you over the phone (and some, gasp!, in person). However, trading online offers several benefits including 24/7 availability, research tools, real time quotes, and quick execution of trades.
Our advice is geared towards online trading since, well, we’re a Web site, and additionally, because we like the advantages online trading offers. Most of the advice in this article will also help you if you choose to trade using a traditional broker.

Not all Platforms are Created Equally

The trading software offered by Forex brokers is one of the most important factors for your decision on which broker to use. This software (also referred to as a trading platform) will enable you to research currency pairs and place orders.
Most brokers will allow you to open a demo account (more on that later), so that you can test drive their services before signing up and executing real trades. There are several things you should consider when examining a broker’s software:
  • Ease of Use: Is the software intuitive and easy for you to use? A system could offer many features, but if you can’t find or figure out how to use them then they are worthless.
  • Account Information: A good system should display your balance, available margin, and your gains/losses. This will enable you to manage and track your trades efficiently.
  • Real-Time Quotes: One of the main advantages of trading online is the capability to view real-time quotes. You don’t have to worry about delays and guess at what price your order will actually be placed.
  • Instant Execution: Along with real-time quotes should be the instant execution of a requested trade. Many systems will offer a point-and-click interface to easily place trades. It is important that your broker’s system doesn’t re-quote the currency pair when you place an order.
  • Technical Analysis Tools: Most online Forex brokers will offer some sort of charting and analysis software. Make sure that the tools offered suit your needs and can be used effectively.
One last thing to mention when discussing online trading is the necessity of a broadband or high-speed connection. It’s time to say goodbye to the days of dial-up once and for all (old AOL CDs make great coasters). Plus, if you’ve got enough money to comfortably trade currency, then you’ve got enough to afford high-speed internet.

Surviving as a Beginner: Education, Responsibility, and Expectations

Many people expect to end up swimming through mountains of money in their own private vault like Scrooge McDuck when they start trading Forex. This is most likely not the case. It takes beginning investors years to develop the skills necessary to excel as a Forex trader.
As with any career, it takes dedication and hard work in order to succeed at trading currency. The old Japanese proverb, “fall down seven times, stand up eight” is very applicable as you start out in Forex trading.
The three main things to consider as you establish a career as a Forex trader are education, responsibility, and expectations. If you are able to manage these three areas effectively then you will eventually do well in currency trading.

Seek Ye Knowledge

In order to survive as a beginning Forex trader, you must learn all you can about foreign exchange markets. Simple, right? Not so fast. So, how do you go about tackling this daunting task?
The first thing to do is start learning about the fundamentals of currency trading – which we assume you’ve started since you are visiting this site. It would also be wise to familiarize yourself with the basic principles of macroeconomics and to understand the current foreign policies affecting currency markets.
It is important to educate yourself about key economic indicators such as interest rates, employment rates, gross domestic product (GDP), gross national product (GNP), etc. In a sense, you must learn the lingo so you start to know what to look for when you are trading.
Another area of expertise you should look to develop is a keen understanding of technical analysis. This will give you the ability to analyze charts, identify trends, and forecast results. Much of Forex trading involves crunching numbers and trying to make sense out of mounds of data. Technical analysis skills will give you a distinct advantage as a beginning trader.

Buckle Your Seat Belt and Check Your Rearview Mirror

The Forex market is a relatively new market involving many speculators – all hoping to strike it rich. Since it has only been within the last few decades that the general public has access to currency trading, it has created an atmosphere which is somewhat akin to the gold rush of the 1840s and the dotcom hysteria of the late 1990s.
It is your responsibility as a new Forex investor not to get caught up in the hype. We strongly recommend that you open a demo account and set aside a long period of time – at least 6 months – during which you promise only to trade fake money. This should give you time to go through a few waves of different world and economic events in which you can see how the currency market reacts.
You must also be responsible not to exceed your financial limitations when you start trading. Forex offers unprecedented margin or leverage for an investing vehicle, and while this can eventually help you rack up big profits, it will also cause you to rack up big losses when you are first starting off.
Set aside an amount of money that you know you can lose – some people recommend saving the money you would have invested during your demo period – and do not put yourself in a position to trade more than that. Consider it a less glamorous Las Vegas trip when you tell yourself that you’ll only spend $500, no matter how quickly you lose it at the craps table.

Great Expectations

Many people say that money doesn’t buy happiness, but from our experience we’ve learned that it makes a great down payment. Most investors don’t start trading Forex because they’re bored or enjoy crunching mountains of numbers just for the fun of it. Most Forex traders start investing for one reason – to make money, lots of money.
It is vital that as you begin trading currency you keep your expectations reasonable. Don’t turn in your two weeks’ notice the day you place your first trade, and don’t take out a second mortgage on your house to fund your investments.
Most beginning Forex traders LOSE money. This is one of the main reasons we recommend opening a demo account first. Expect to lose money on the majority of your trades as you begin; however, make sure you evaluate why you were wrong and identify what you can do differently. For example, did you buy too early or sell too late? Or did you misread the impact a certain economic indicator was going to have?
Reasonable expectations will help you not to get discouraged as you start trading currency. This will allow you to avoid getting frustrated and instead learn from your mistakes and keep improving. If you are able to do this, than you can expect to become a very successful Forex trader.

Get Started

It’s time to get your feet wet and prepare to dive in. The first step is to open a demo account with a credible broker and start practicing. The second step is to keep learning as much as you can while you are not using any of your own money and then start using advanced techniques such as technical analysis.
The world of a Forex trader is fast-paced and exciting, but just like most NBA players had to start playing high school and college ball before earning big bucks as a professional, you will also need to put in the hours first. Once you start, though, you will discover how profitable the Forex market is and will learn how to take advantage of it with a great deal of success.

Basic Trading Math: Pips, Lots, and Leverage

Pips, Lots, and Leverage – oh my! Pips, Lots, and Leverage – oh my! No, this isn’t the set of a twisted, new production of the Wizard of Oz in which the Tin Man wears glasses and a pocket protector. These are some common words used in currency trading that you will need to add to your vocabulary in order to become a successful Forex investor.

You’ve probably come across these terms already during your investigation into currency trading. It is important to get a good grasp of these concepts before we go any further and explore the math associated with them. These concepts set the stage for knowledgeable Forex analysis and trading.

The Pip Exposed

As discussed in previous library articles, a pip is the smallest price change a given exchange rate can make. Most major currency pairs are priced to four decimal points, so the smallest change for most exchange rates is equal to a 1/100th of one percent increase.
Your profits and losses can be calculated in terms of how many pips you gained or loss. A pip is derived by comparing the starting rate to the ending rate. The difference between the two is how many pips you gained or lost.
For example, if the exchange rate for the USD/CHF was initially 1.2155 and rose to 1.2159 then it has moved 4 pips – which could be good or bad depending on whether you own Francs or Dollars.

Pip Examples

Each currency has its own value which is usually expressed in relationship to another currency. As such, the value of one pip is different for each currency pair and depends on several factors – the main aspect being the exchange rate.
The value of a pip is derived by taking 1/10,000 of most currency pairs (this holds true for all exchange rates quoted with 4 decimal places – Japanese Yen or JPY is an exception and will be explained later) and dividing that by the exchange rate:
pip = 1/10,000 ÷ Exchange Rate
Let’s take a look at several of the main currencies to gain a better understanding of how a pip is calculated. We will express these examples where the USD is quoted first in order to express the value of the pip in terms of U.S. dollars.

Common Pip Calculations

Let’s assume that the exchange rate for the USD/EUR is 0.7272. Since the rate is quoted to the fourth decimal place then we can use our trusty formula of: pip = 1/10,000 ÷ Exchange Rate. So,
0.0001 ÷ 0.7272 = 0.00013751
Therefore, one pip for the USD/EUR currency is worth 0.000138.
Now, let’s assume the exchange rate for the USD/EUR is now 1.1234. Using our same logic and formula we can calculate the value of a pip:
0.0001 ÷ 1.1234 = 0.00008902
Doesn’t seem like much? Well, in the following discussions about lots and leverage you will see how pips can add up quickly.

Pip Exceptions

There’s one little wrinkle in our pip calculations. What happens when the exchange rate of a currency pair is not expressed to four decimal places? While, this doesn’t happen too frequently there is one notable occurrence which is when the Japanese Yen or JPY is part of the currency pair.
Currency pairs involving the JPY are quoted with only two decimal places, so instead of using 1/10,000, we will now use 1/100 in our pip calculation which will look like this:
pip = 1/100 ÷ Exchange Rate
Let’s assume that the exchange rate for the USD/JPY is 123.51. To calculate the value of one pip for the USD/JPY pair with an exchange rate of 123.51 we would perform the following math:
0.01 ÷ 123.51 = 0.00008097
Therefore, one pip for the USD/JPY is worth 0.00008097.

A Lot Explained

Wheeewww. That seems like a whole bunch of work to calculate such small value. Don’t worry – pip values will almost always be calculated for you by most brokers and in most online trading platforms. But, a larger question is probably starting to form in your mind – How can I ever make any money in Forex trading with these worthless pips?!?
The answer can be explained by discussing the Forex term of a lot. Spot Forex is traded in lots or groups. The standard size for a lot is $100,000 and $10,000 is considered a mini lot size. Since currencies are measured in the tiny values of a pip, Forex trades are conducted with a large amount of money in order to gain a profit (or incur a loss).

Lots and Pips (Together at Last)

Let’s pretend that you just inherited $100,000 from your great aunt Matilda (may she rest in peace) and have decided to execute a few Forex trades. Since you have $100,000 you will be able to purchase a standard lot size from a broker.
After doing some research you decide to buy one standard lot of the USD/EUR at an exchange rate of 1.1234. Let’s find out how much one pip is now worth to you.
We do this by using our pip formula from before and multiplying it by your lot value, so it now looks like this:
pip = (1/10,000 ÷ Exchange Rate) x Lot Value
To apply this to our example, our formula looks like:
(0.0001 ÷ 1.1234) x $100,000 = $8.90 (rounded to two decimal places)
Therefore, the value of each one of the pips in your possession is worth $8.90 at the time of your Forex purchase. Ok, let’s now look at how this pip can earn you some money.

Profiting with Pips and Lots

Exchange rates are quoted in pairs as well know as the bid/ask spread. The first number in the spread is known as the bid price and the second is known as the ask price. So, for a bid/ask spread of 1.1229/34 the bid price is 1.1229 and the ask price is 1.1234.
For our example – remember dear Aunt Matilda? – let’s assume that when we bought our lot of USD/EUR the bid/ask spread was 1.1229/34 which is why we were able to buy our lot at the exchange rate of 1.1234 (the ask price).
A few hours later, you check the USD/EUR quote and discover that the bid/ask spread is now 1.1240/1.1247. This means the exchange rate at which you can sell your lot (the bid price) has increased to 1.1240. So, how many pips did you gain?
This can be calculated by subtracting the ask price you bought your lot of currency for from the bid price you can now sell your lot of currency for and then multiplying it by 10,000. Sounds confusing, but the following formula shows how simple it is using our example:
1.1240 – 1.1234 = 0.0006 then multiplied by 10,000 = 6 pips.
Now, in order to calculate your profit in actual dollars, take the number of pips you gained and multiply it by the value of your pips (which we calculated in the previous section). So, our actual profit from the money Aunt Matilda left us can be derived as follows:
(0.0001 ÷ 1.1234) x $100,000 = $8.90 x 6 pips = $53.40.


Alright, so if the standard lot size for currency trading is $100,000 then you’ve got to be a millionaire to trade Forex, right? Historically, this was the case. For a long time currency trading was consigned to huge corporations and the ultra-rich. However, regulatory modernization has allowed smaller traders to engage in Forex by allowing high-leverage trading.
Leverage is the ability to use borrowed funds based on the principal amount of money that you are able to invest. Many Forex brokers will offer leverage in ratios as high as 400:1.This means that if you have $250 to invest and a broker is willing to let you leverage that money at a 400:1 ratio then you are able to buy $100,000 ($250 x 400) or one standard lot.
How is this possible? Since Forex fluctuations are typically small (a one cent or 100 pips trade is considered a large move) – a broker is able to hold a small amount of collateral for a given position. Also, brokers will usually require a minimum balance for opening an account with the amount of leverage offered being tied to the size of the account opened.

Leverage applied

Leverage allows Forex investors to gain a much higher return on their initial investment (it also allows for higher losses as well). Let’s use another example to demonstrate how leverage works.
Instead of inheriting $100,000 from Aunt Matilda, let’s now pretend that you take $1,000 which you earned cutting grass in your spare time and open a mini-account with a reputable Forex broker which offers 400:1 leverage.
Now, instead of using a full $100,000 to buy a standard lot we use $250 plus the leverage offered by the broker to buy a standard lot. Assume the same conditions exist as they did when we used Aunt Matilda’s money and we make a profit of $53.40 in a few hours. Our profit is still the same, but our rate of return is MUCH greater. Take a look:
Return on Investment (ROI) with Aunt Matilda’s Money: $53.40 ÷ $100,000 = 0.05%.
ROI with Leverage: $53.40 ÷ $250 = 21.36%
As you can see, using leverage GREATLY increase your return on investment. Would you rather earn 0.05% or 21.36% on your hard earned cash?

Margin Call

A natural question that emerges when discussing margin trading is what happens if I lose more money than I have in my account? Most Forex broker institute margin calls to ensure that you never lose more money then you have invested in your account.
Most margin calls are executed in real-time and on an automatic basis to close positions immediately before the market moves any further against a trade. Margin requirements – the amount of money put aside as collateral when opening a leverage position – vary from broker to broker and often depend on the size of your account.
Margin trading is can be dicey if you have not thoroughly researched your broker’s margin call policies and are not comfortable with risk involved. However, using margin as leverage will greatly increase your profits as a Forex trader.

Pop Quiz

You should now be able to understand now only what someone means when they mention a pip, lot, or leverage – but also how to apply it as a Forex trader. This comprehension will help you as we continue our discussion about currency trading.

400% Profits in 3 Days!!- How to Spot a Forex Scam

Start researching Forex and you’re likely to see several ads proclaiming ridiculous guarantees such as “2,000 pips a Day!” or “400% Profits in 3 Days!!” Before you quit your day job and start trading Forex fulltime because of these outlandish claims, let’s evaluate how to spot a Forex scam.

Unfortunately, many people associate Forex trading with scams, and perhaps for good reason. The number of unscrupulous companies has been increasing. The number of Forex-related scams has increased abruptly over the last few years, and it is important for you to be able to identify a hoax.
Currency trading is an exciting and potentially profitable investment option, but as with anything involving money, there are people out there who will rob you blind if you don’t know what you’re doing. Let’s take a closer look at Forex scams, so you are properly equipped to spot one.

Understand Genuine Forex Operations

So, where are Forex scams likely to occur? Advertisements for scams can often be spotted in online pop-ups, newspaper advertisements, and the classified sections of financial magazines. How do you weed out the good from the bad?
A first step is to learn how legitimate Forex trading is conducted. Generally, Forex traders can place orders through an exchange or board of trade, a bank, insurance company, registered securities broker/dealer, or other financial institution.
This means that you should search out these types of institutions in order to trade currency. It also means that many scammers will masquerade as one of these types of companies in order to trick you. So where can you turn for help? Is there anyone out there tracking down and punishing these evil-doers? Never fear, the CFTC is here to help you.

Meet A powerful Ally – The CFTC

Even though Jack Bauer doesn’t work there (that’s CTU), the CFTC or Commodity Futures Trading Commission is a great source of information for Forex scams. They have been working tirelessly to crack down on the number of scams, and while it has taken longer than 24 hours, their efforts have produced solid results which Forex traders can utilize.
In the United States, the CFTC has federally mandated authority and jurisdiction to investigate and take legal action when appropriate against corrupt Forex brokers. Additionally, they have the ability to prosecute any firm registered with the CFTC if the firm’s actions violate any CRTC-mandated rules.
The CFTC was empowered in December 2006 with the passing of the Commodity Futures Modernization Act. Their efforts have centered on educating potential Forex traders about currency trading’s best practices as well as keeping tabs on the people who offer Forex services.

CFTC Guidelines

The CFTC has issued several reports concerning the offering and trading of foreign currency futures and options contracts. Some of the main points of advice from the advisory are the following:
  1. Stay Away From Opportunities That Sound Too Good to Be True
  2. Avoid Any Company that Predicts or Guarantees Large Profits
  3. Stay Away From Companies That Promise Little or No Financial Risk
  4. Don’t Trade on Margin Unless You Understand What It Means
  5. Question Firms That Claim To Trade in the “Interbank Market”
  6. Be Wary of Sending or Transferring Cash on the Internet, By Mail or Otherwise
  7. Currency Scams Often Target Members of Ethnic Minorities
  8. Be Sure You Get the Company’s Performance Track Record
  9. Don’t Deal With Anyone Who Won’t Give You Their Background
Additionally, the CFTC warns to be careful of unsolicited phone calls about “can’t miss” investments from offshore salespersons or companies that don’t sound familiar.
The following are some of the steps prescribed to identify a potential scam by the CFTC, and we encourage you to follow them:
  • Contact the CFTC.
  • Visit the CFTC’s forex fraud Web page.
  • Contact the National Futures Association to see whether the company is registered with the CFTC or is a member of the National Futures Association (NFA). You can do this easily by calling the NFA or by checking the NFA’s registration and membership information on its Web site. While registration may not be required, you might want to confirm the status and disciplinary record of a particular company or salesperson.
  • Get all information about the company and verify that data, if possible. If you can, check the company’s materials with someone whose financial advice you trust.
  • Learn all possible information about fees charged, and the basis for each of these charges.
  • If in doubt, don’t invest. If you can’t get solid information about the company, the salesperson, and the investment, you may not want to risk your money.

No Free Lunch

One of the basic principles of economics is the concept that there is no such thing as a free lunch. This concept is for the most part true (soup kitchens excluded) and particularly applies to any type of investing, especially Forex trading.
If a Forex claim seems too good to be true and a broker is seemingly giving money away, then don’t invest. This doesn’t mean you shouldn’t try to find low commissions or low bid/ask spreads, but remember there is no invincible Forex formula or brokerage which will enable you to instantly make huge amounts of money trading currency.

Never Stop Learning

The only foolproof method to avoiding currency scams and to become a successful Forex trader is to gain as good an education as possible. The more you learn about Forex trading in general, the easier it will be to spot currency trading scams.
For example, what would happen if on your way into your favorite electronics store, someone stopped you and said not to buy that Plasma which you’ve been saving all year for, because they could guarantee you a better television at half the price? They explain all you have to do is give them $1000 in cash and they’ll present you with the TV.
Would this get your attention? Of course. Would this be a good idea? Not unless you want to wave goodbye to one thousand hard-earned dollars. How do you know? You’re a well-informed and responsible consumer with years of purchasing experience. In order to identify Forex scams you must also become a well-informed and responsible Forex investor.