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1. Select a currency pair
When trading forex you are exchanging the value of one currency for another. In other words, you will always buy one currency while selling another at the same time. Because of this, you will always trade currencies in a pair. Let's look at EUR/USD (Euro/ U.S. Dollar).
2. Analyze the market
When you research a particular currency pair, you should regularly look at current and historical charts, monitor the news for economic announcements, check indicators and perform other technical and fundamental analysis.
3. Read the quote
Take EUR/USD for example, The first rate (1.18320) is the price at which you can sell the currency pair. The second rate (1.18336) is the price at which you can buy the currency pair. The difference between the first and the second rate is called the spread. This is the amount that a dealer charges for making the trade.
4. Pick your position
With a buy position, you believe that the value of the base currency will rise compared to the quote currency. With a sell position, you believe that the value of the base currency will fall compared to the quote currency
5. Close your position
Let’s imagine that you believe that the euro is bearish, your trade is entered at the price of 1.20115. You look at your position later in the day and discover that the EUR/USD is now at 1.20106/20122. Your trade has gained 177 pips. You decide to close your position at the current sell price of 1.20106 and take a profit.
The calculation of required margin is performed as follows:
Margin: Number of lots × Units traded (Contract size in micro-lots) × Margin percentage ÷ Leverage
* Units are expressed in the base currency.
* Margin percentage is an element of contract specification, which will prevent you from opening a trade unless you have sufficient margin % in your account.
Margin percentage is a buffer against the possibility of the client losing over 100% of their margin. This means our risk software will block trading unless available margin is above 100% of required margin.
This added available percentage over the required margin dictates the trigger to block the trade/order. This vital information can be found by right clicking the pair in the 'market watch' window and selecting 'specification' and looking at the ‘margin percentage’ variable.
To calculate the amount of margin used, multiply the size of the trade by the margin percentage. Subtracting the margin used for all trades from the remaining equity in your account yields the amount of margin that you have left.
* The first currency in the pair is called the base currency, while the second currency is called the quote or counter currency. The price of the base currency is always calculated in units of the quote currency.
For example, the exchange rate for the EUR/USD pair is 1.12787. Let's suppose we are buying EUR/USD. Contract volume of 1 standard lot equals to 100,000 units and margin percentage is set on the level of 100%.
Let's assume further that your current leverage is set to 50:1 and the current exchange rate of the EUR against the US dollar is 1.12788 / 1.12787. At this time the required margin for buying 3 lots (traded size of 300,000 units) of EUR/USD is:
3 × 100,000 × 100% ÷ 50 = 6,000 EUR.
After converting it to US$ we get:
6,000 × 1.12788 = 6,767.28 USD
*Converting the base currency into USD, please pay attention to the following:
When you trade major currency pairs, the opening price of the trading symbol is used.
When you trade minor currencies, the average price quoted by the base currency against the US dollar is used, which is specifically: (Bid price + Ask price) ÷ 2.
Long position: In case of a long position, if the prices move up, it will be a profit, and if the prices move down it will be a loss.
Short position: In case of a short position, if the prices move up, it will be a loss, and if the prices move down it will be a profit.
The formula for calculating the profit and loss of a currency pair is:
P&L = Number of lots × Contract Size × PIP movement
PIP movement(BUY) = Ask price at closing time — Bid price at opening time
Pip movement(SELL) = Ask price at opening time — Bid price at the time of closing a position
* the unit in the fomular is same with the quote currency
Let's suppose we are trading EUR/USD.
The platform's EUR/USD exchange rate is 1.12788/1.12787 when Lilly buys one lot of EUR/USD, and Tony sells one lot of the same pair.
A week later the EUR/USD exchange rate rises to 1.12928 / 1.12927; Tony & Lilly will now calculate their profits.
Lilly's P&L = 100,000 × (1.12927 - 1.12788) = 139 USD
Tony's P&L = 100,000 × (1.12787 - 1.12928) = -141 USD
* Another aspect of the P&L is the currency in which it is denominated. In our example the P&L was denominated in dollars. However, this may not always be the case.
A GBP/USD pair is quoted in terms of the number of USD per GBP. GBP is the base currency and USD is the quote currency. At a rate of GBP/USD 1.3147, it costs USD 1.3147 to buy one GBP. So, if the price fluctuates, it will be a change in the dollar value. For a standard lot, each pip will be worth $10, and the profit and loss will be in USD. As a general rule, the P&L will be denominated in the quote currency, so if it's not in USD, you will have to convert it into USD for margin calculations.
Consider you have a 100,000 short position on USD/CHF. In this case, your P&L will be denominated in Swiss francs. The current rate is roughly 0.9970. For a standard lot, each pip will be worth CHF 10. If the price has moved down by 10 pips to 0.9960, it will be a profit of CHF 100. To convert this P&L into USD, you will have to divide the P&L by the USD/CHF rate, i.e., CHF 100 ÷ 0.9960, which will be $100.4016.
* All above calculations are made for accounts with USD as the base currency
A currency pair is the quotation of two different currencies, with the value of one currency being quoted against the other.
The first listed currency of a currency pair is called the base currency, and the second currency is called the quote currency or counter currency.
Opitions on major forex pairs defintion differ slightly, but most will include the traditional 'four majors' – EUR/USD, USD/JPY, GBP/USD and USD/CHF – as well as the three most-traded 'commodity currencies' against the US dollar, which are AUD/USD, USD/CAD and NZD/USD.
Safe-haven currency, hedge currency or strong currency is any globally traded currency that serves as a reliable and stable store of value. Factors contributing to a currency's hard status might include the long-term stability of its purchasing power, the associated country's political and fiscal condition and outlook, and the policy posture of the issuing central bank. Safe haven currency is defined as a currency which behaves like a hedge for a reference portfolio of risky assets conditional on movements in global risk aversion.
Switzerland can be considered as a stable and safe country. The same accounts for its currency, the Swiss Franc (CHF). The currency is often referred to as the safe-haven currency, as it is a backup for investors during times of geopolitical tensions or uncertainty. The safe-haven currency is a leftover from the Cold War. Nevertheless, more recently during the aftermath of the Global Financial Crisis and the Eurozone debt crisis of 2009-2010, the name once again proved itself. The Swiss Franc emerged again as a safer alternative to other major currencies, such as the USD, EUR, JPY and GBP, which are all involved in high debt levels and negative economic outlooks
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Tips for Forex Trading Beginners