“How To” Start Trading The Forex Market? (Part 5)
What are *PIPS* ? Currencies are traded on a price/ point (pip) system. Each currency pair has its own pip value. When you see a FOREX price quote, you'll see something listed like this: EUR/USD 1.2210/13 Explanation: a) If you want to BUY the EUR/USD ( meaning you BUY EUROS and SELL US$ ) you buy 100,000 EUROS and you SELL 122,130 US$, or in other words you receive 122,130 US$ for 100,000 EUROS. B) If you want to SELL the EUR/USD ( meaning you SELL EUROS and BUY US$ ) you buy 122,100 US$ and sell 100,000 EUROS, or in other words you receive 100,000 EUROS for 122,100 US$. The difference between the bid and the ask price is referred to as the spread.
In the example above, the spread is 3 or 3 pips. Since the US dollar is the centerpiece of the FOREX market, it is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example a quote of USD/CHF 1.
3000 means that fore one U. dollar you receive 1.30 Swiss Francs. or in other words, you receive 1.30 Swiss Franc for each 1 US$. When the U. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/CHF quote above increases to 1.
3050 the dollar is stronger because it will now buy more Swiss Franc than before. The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as EUR/USD 1.2080, meaning that for EURO you receive 1.2080 U. Dollars. In these three currency pairs, where the U. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.
dollars to equal one Euro, British pound or an Australian dollar. In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening. Currency pairs that do not involve the U. dollar are called cross currencies, but the calculation is the same. For example, a quote of EUR/JPY 134.50 signifies that one Euro is equal to 134.50 Japanese yen.
HOW TO BUY ( going “ LONG ”)and SELL ( going “ SHORT ”) in the FOREX Market? Keep in mind 2 very important rules: RULE # 1) Cut your LOOSING trades and let your WINNING trades RUN YOU WILL HAVE LOSING TRADES. Every FOREX trader has. The secret is, that a consistent, disciplined trader, at the end of the day, adds up more winning trades than losing trades. When you and see on your charts, without any doubt, that you are in a losing trade, don't keep losing money. Most of the novice traders are lowering their stop loss just to “prove they are right” or “hoping that the market will reverse”. 99% of these trades, are ending up with more losses. Most of the profitable trades are usually "right" immediately. Remember, smart traders know there are many other opportunities. CUT your losses short and compound those winning positions.
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