How to Work Foreign Currency Trade
The concept of FX (foreign exchange) trading is simple, once we realize that currency is a commodity whose value fluctuates against other currencies. By buying (or selling) a currency, Trader FX (Foreign Exchange) aims to benefit from the movement of the FX (foreign exchange) exchange rate. The advantage of FX (Foreign Exchange) is that the trade costs are very low. This means that transactions can be made for very short periods of time, literally a few seconds, as well as for a longer duration.
Example
A trader believes that the EUR will increase in value against USD and buy EUR 1 million at the exchange rate of 1.5000. Shortly after, the exchange rate became 1.5050, and traders closed their positions by earning USD 5,000.
EUR 1,000,000 at the rate of 1.50 = USD 1,500,000
EUR 1,000,000 at the rate of 1.5050 = USD 1.505.000
Difference = Gain of USD 5,000
Major Currency Pairs
There are about 170 currencies in the world. However, activity is concentrated into six 'major' currency pairs, which account for about two-thirds of total turnover.Major Currency Pairs are:
EUR / USD (27%)
USD / JPY (13%)
GBP / USD (12%)
AUD / USD (6%)
USD / CHF (5%)
USD / CAD (4%)
Currency Pair
In FX (foreign currency), one currency is always offered against another currency. The base currency is a currency that may be considered a reference. For example, in the EUR / USD offer, EUR is the base currency, and the offer determines how much it costs to buy USD. Similarly, in USD / JPY, USD is the base currency and the exchange rate determines how much it will cost to buy JPY.Bid (Buy) and Offer / Ask (Sell)
Bid (buy) is the price the market is willing to pay for a certain currency pair FX (foreign exchange). Offer or ask (sale), is a price ready for sale.For example, in USD / CHF bid 1.1650 / 1.1653, the bid (buy) rate is 1.1650, while the offer rate (sell) is 1.1653. Often, the offer is shortened by simply listing 'small numbers'. In this case, telephone bidding is 50/53.
The difference between bid (buy) and offer (selling) is known as spread (spread).
Pip
'Pip' (price interest point) represents the smallest price fluctuations of the currency pair. For most currencies, the rate is offered up to the fourth decimal point, except for USD / JPY. A pip represents 1 / 10,000, or 0.0001 of the currency of the counterpart. The 1 pip change for GBP / USD at 1.6319 is 1.6320. Pip for USD / JPY is offered only to the second decimal point (1/100 or 0.01).Profit & Loss Calculation
Most modern platforms, such as the MIG Trading Station, automatically calculate the trader's profit and loss (P & L) on open positions. This allows traders to track when the market moves. Understanding how these calculations work is so important to all merchants.The diagram below shows a summary of the currency pair provided by MIG, the lot size of each currency pair and the value of each pip per lot. Examples of advantages and disadvantages (P & L) that follow are from this diagram:
| Pasangan Mata Uang | Sebaran Rekening Mini | Sebaran Standar | Sebaran VIP/ECN |
|---|---|---|---|
| AUDCAD | 3.9 | 3.3 | 2.5 |
| AUDCHF | 4 | 3.4 | 2.6 |
| AUDJPY | 3.8 | 3.2 | 2.4 |
| AUDNZD | 4.7 | 4.1 | 3.3 |
| AUDUSD | 3.2 | 2.6 | 1.8 |
| CADJPY | 3.9 | 3.3 | 2.5 |
| CADCHF | 3.9 | 3.3 | 2.5 |
| CHFJPY | 4 | 3.4 | 2.6 |
| EURAUD | 3.8 | 3.2 | 2.4 |
| EURCAD | 4.1 | 3.5 | 2.7 |
| EURCHF | 3.6 | 3 | 2.2 |
| EURGBP | 3.2 | 2.6 | 1.8 |
| EURJPY | 3.2 | 2.6 | 1.8 |
| EURUSD | 2.8 | 2.2 | 1.3 |
| EURNZD | 5.2 | 4.3 | 3.2 |
| GBPAUD | 4.4 | 3.8 | 3 |
| GBPCAD | 4.4 | 3.8 | 3 |
| GBPCHF | 4.6 | 4 | 3.2 |
| GBPJPY | 4.3 | 3.7 | 2.9 |
| GBPUSD | 3 | 2.4 | 1.6 |
| GBPNZD | 5.2 | 5 | 4.2 |
| NZDJPY | 4.2 | 3.6 | 2.8 |
| NZDUSD | 3.5 | 2.9 | 2.1 |
| NZDCHF | 4.2 | 3.7 | 2.9 |
| NZDCAD | 4.2 | 3.3 | 2.9 |
| USDCAD | 3.2 | 2.6 | 1.8 |
| USDCHF | 3.3 | 2.7 | 1.9 |
| USDJPY | 2.8 | 2.2 | 1.4 |
| USDSGD | 3.6 | 2.8 | 1.9 |
| EURSGD | 4.2 | 3.8 | 2.2 |
| USDHUF | 21.2 | 20.1 | 18 |
| EURHUF | 21.2 | 20.1 | 19.2 |
| USDPLN | 33.6 | 23 | 22 |
| EURPLN | 33.6 | 23 | 22 |
| USDCNH | 30 | 25.7 | 22.4 |
| USDDKK | 35.5 | 30 | 25.4 |
| EURDKK | 35.5 | 30 | 25.4 |
| USDNOK | 35.5 | 28.6 | 27.3 |
| EURNOK | 35.5 | 30.7 | 23.8 |
| USDSEK | 43 | 36.6 | 30 |
| EURSEK | 54 | 45 | 39 |
| USDHKD | 38 | 32.3 | 26.9 |
| USDRUB | 432 | 368 | 320 |
| USDMXN | 85.6 | 74.7 | 67.2 |
| Please note: The spreads quoted above are variable and start from the level specified in the table. | |||
Profit & Loss Calculation - Example
Sell ??3 lots of EUR / USD at the exchange rate of 1.3196 and buy it at the exchange rate 1.3122:
In this example, the client gets a total profit of 74 pip * 3 lots = 222 pip (because it is sold at a price higher than the purchase). The pip value for EUR / USD is USD 10, so total profit = 222 pip * USD 10 per pip = USD 2.220.
Bought 2 lots of USD / JPY at exchange rate of 117.75 and sold it at exchange rate 117.32:
In this example, the client gets a total loss of 43 pip * 2 lots = 86 pips (because it is sold at a price lower than the purchase). The pip value for USD / JPY is JPY 1,000, and this is equal to 1000 / 117.32 (USD / JPY when position closes) = about USD 8,524, so total client loss = 86 pips * USD 8,524 per pip = USD 733.06 .
Sell ??2 lots of EUR / GBP at the exchange rate of 0.8615 and buy it at the exchange rate 0.8526:
In this example, the client gets a total profit of 89 pips * 2 lots = 178 pips. The pip value for EUR / GBP is GBP 10 and this equals 10 * 1.8500 (assuming that the price of GBP / USD is 1.8500 when the position closes) = USD 18.50, so the total profit is 178 pip * USD 18, 50 per pip = USD 3,293.
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