Basics for forex trader.

 

Reading a Forex Quote :

Forex prices are quoted in currency pairs and almost always to four decimal places. For example, if a forex quote is given as EUR/USD = 1.3255, the currency on the left is termed the “base currency” while the currency on the right is termed the “counter currency.” The base currency always has a value of 1. In the example, the euro is the base currency while the U.S. dollar is the counter currency. This is how we would read the forex quote: 1 euro is equivalent to 1.3255 U.S. dollars at that point of time. This forex quote tells us two things. First, if traders are eager to purchase one unit of the base currency, they would have to pay 1.3255 U.S. dollars to buy 1 euro. If, however, traders are eager to sell one unit of the base currency, they would receive 1.3255 U.S. dollars for selling 1 euro. It is also important to note that the exchange rate always fl uctuates with changing market conditions. At any time, the euro can weaken or strengthen against the U.S. dollar. If the EUR/USD quote moves up from 1.3255 to 1.3287, the euro is strengthening against the U.S. dollar. However, if the EUR/USD quote moves down from 1.3255 to 1.3138, the euro is weakening against the U.S. dollar. 

 The Yen Factor :

 Not all forex quotes are created equal, especially when it comes to the Japanese yen. Whenever the Japanese yen is in the counter currency, the forex quote is given in two decimal places instead of four. Let ’s take a look at an example. USD / JPY = 80.55 The quote tells us that 1 U.S. dollar is equivalent to 80.55 Japanese yen at that point of time. If the USD/JPY quote moves up from 80.55 to 80.87, the U.S. dollar is strengthening against the Japanese yen. If the USD/JPY quote moves down from 80.55 to 79.78, the U.S. dollar is weakening against the Japanese yen.

 Pip  :

 Pip stands for “price interest point.” It is the unit of measurement to express the change in value between two currencies

   Let ’s say that the current AUD/USD price is 1.0235. If the price rises to 1.0236 or falls to 1.0234, this is a movement of 0.0001, or 1 pip. If the current c01.indd 7 03/12/12 9:53 AM 8 FOREX IS A GAME price of USD/JPY is 81.33, and if the price rises to 81.34 or falls to 81.32, this is a movement of 0.01, or 1 pip.

One pip is thus the smallest change in value for any given forex quote, whether it ’s quoted to two or four decimal places. Here are more examples:

•  When the EUR/USD quote moves up from 1.3255 to 1.3287, it is a movement of 32 pips.When the EUR/USD quote moves down from 1.3255 to 1.3138, it is a movement of 117 pips

• When the USD/CHF quote moves up from 0.9148 to 0.9263, it is a movement of 115 pips. When the USD/CHF quote moves down from 0.9148 to 0.9126, it is a movement of 22 pips.

• When the USD/JPY quote moves up from 80.55 to 80.87, it is a movement of 32 pips. When the USD/JPY quote moves down from 80.55 to 79.78, it is a movement of 77 pips. 

Lot Size :

Most forex brokers today provide up to four categories of lot sizes for the trader. These are:

1. Standard lot
2. Mini lot 
3. Micro lot 
4. Nano lot

 A standard lot is defi ned as 100,000 units of the base currency. For an example, when you buy 1 standard lot of EUR/USD, you are purchasing 100,000 euros with U.S. dollars.

A mini lot is defi ned as 10,000 units of the base currency. For an example, when you buy 1 mini lot of GBP/USD, you are purchasing 10,000 pounds with U.S. dollars. 

 A micro lot is defi ned as 1,000 units of the base currency. For an example, when you buy 1 micro lot of USD/CHF, you are purchasing 1,000 U.S. dollars with Swiss francs. 

 A nano lot is defi ned as 100 units of the base currency. For an example, when you buy 1 nano lot of USD/CAD, you are purchasing 100 U.S. dollars with Canadian dollars. The lot size decreases by a factor of 10 from standard, to mini, to micro, and fi nally to nano, as shown in Table 1.1 .