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Forex Tutorial Page 2

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Learn Trading Forex Basic, Tutorial, and Guide. How To Trade Forex Calculating Profit (Loss) and Pip Value
As we have specified in earlier page, in order to calculate the pip value or how much is one pip, you have to know some additional information such as: contract size, leverage used, and the actual rate of the pair for which you want to calculate the pip value

There are 3 groups of Currency Pair :
  1. Direct Rates
    Currency Pairs at which USD operating as counter currency (USD is located at the right side of currency pair), example : GBP/USD, EUR/USD, AUD/USD, NZD/USD
  2. Indirect Rates
    Currency Pairs at which USD operating as base currency (USD is located at the left side of currency pair), example : USD/JPY, USD/CHF, USD/CAD
  3. Cross Rates
    Currency Pairs which do not involve USD, example : GBP/JPY, EUR/JPY, AUD/JPY, EUR/GBP, GBP/CHF
How to Calculate Profit and Loss of Direct Rates (GBP/USD, EUR/USD, AUD/USD, and NZD/USD):

0.0001 x contract size x lot = Pip Value

Example : 0.0001 x 100.000 x 1 = Pip Value = $10/pip

(Selling Price – Buying Price) x contract size x lot = Profit or Loss

Example :
  1. Buy 3 standard lots EUR/USD at 1.2000
    Sell (liquid) 3 lot EUR/USD at 1.2010

    Profit = (1.2010 - 1.2000) x 100.000 x 3 = $300

  2. Sell 1 standard lot GBP/USD at 2.0001
    Buy (liquid) 1 lot GBP/USD at 2.0000

    Profit = (1.2001 - 1.2000) x 100.000 x 1 = $10
Simple method :
As you can see from example number 2, for every standard lot (100K) the profit is $10/pip. This also means for every mini lot (10K) the profit is $1/pip

How to Calculate Profit and Loss of Indirect Rates (USD/JPY, USD/CHF, dan USD/CAD):

(0.01 / current price) x contract size x lot = Pip Value

Example : (0.01 / 120.50) x 100.000 x 1 = Pip Value = $8.3/pip

[(Selling Price – Buying Price) / Liquidating Price ] x contract size x lot = Profit or Loss

Example :
  1. Buy 1 standard lot USD/JPY at 110.00
    Sell (liquid) 1 lot USD/JPY at 110.01

    Profit = [ (110.01 - 110.00) / 110.01 ] x 100.000 x 1 = $9.09
How to Calculate Profit and Loss of Cross Rates (GBP/JPY, EUR/JPY, AUD/JPY, EUR/GBP,and GBP/CHF):

(Base Currency Price x contract size x lot) / Current Cross Rate = Pip Value

Example :
EUR/GBP Rate : 0.6750, EUR/USD Rate: 1.1840 (EUR/USD is the basic currency of EUR/GBP, as the left side of EUR/GBP Pair is Base Currency) (1.1840 x 100.000 x 1) / 0.6750 = $17,54/pip

{[(Selling Price – Buying Price) x Current Base Currency Price] / Current Price of Cross Pair} x contract size x lot = Profit or Loss

Example :
  1. Sell EUR/GBP 1 Lot at 0.6760
    Buy (Liquid) EUR/GBP at 0.6750
    EUR/USD Rate: 1.1840

    Profit = {[(0.6760 – 0.6750) x 1.1840] / 0.6750} x 100.000 = $175,4
Please note :
If you open a Buy position (going Long), you will open with offer price, and will have to use bid price while selling it back (liqudating, closing, stop loss, and taking profit)

If you open a Sell position (going Short), you will open with bid price, and will have to use offer price while selling it back (liqudating, closing, stop loss, and taking profit)

Profit Target, Stop Loss, and Trailing Stop
Take Profit is a target point at which you want to liquidate your position in profit automatically when the market price hits it.
  1. For Buy/Long position, take profit level is located ABOVE opening price of Buy/Long position. (Note ! Open Buy/Long is based on ASK, Take Profit or Stop Loss is based on BID)
    Example : Buy EUR/USD at 1.2000, Take Profit at 1.2050 (50 points take profit)

  2. For Sell/Short position, take profit level is located BELOW opening price of Sell/Short position. (Note ! Open Sell/Short is based on BID, Take Profit or Stop Loss is based on ASK)
    Example : Sell EUR/USD at 1.2050, Take Profit at 1.2000 (50 points take profit)
Stop Loss is an order to limit potential losses if the market moves against trader’s position.
  1. For Buy/Long position, stop loss level is usually located BELOW opening price of Buy/Long position (Note ! Open Buy/Long is based on ASK, Take Profit or Stop Loss is based on BID)
    Example : Buy EUR/USD at 1.2050, Stop Loss at 1.2000 (50 points stop loss)

  2. For Sell/Short position, stop loss level is usually located ABOVE opening price of Sell/Short position. (Note ! Open Sell/Short is based on BID, Take Profit or Stop Loss is based on ASK)
    Example : Sell EUR/USD at 1.2000, Stop Loss at 1.2050 (50 points stop loss)
Stop Loss can also be used to protect the profit you have got (lock profit). In order to lock the profit you have already got, you can adjust your stop loss by moving it to a level exceeding the profit you want to lock. Move stop loss upward (for Buy/Long Positions) or move it downward (for Sell/Short Positions).

Example :
A trader Open Buy at 2.0000, TP (Take Profit) at 2.0050, SL (Stop Loss) at 1.9970. A few hours later, market price moves upward to 2.0040. The trader is in floating profit position of 40 points. To lock 20 points profit, he can move his stop loss to opening price (2.0000) + 20 points = 2.2020. (you may use 10, 15, 20 or any minimum locking profit level which is allowed by your broker)

Important : For Buy/Long position, the locking profit level must be lower than current floating profit level (2.0020 < 2.0040) and the locking profit level must be higher than opening price level (2.0000 < 2.0020).

If market moves higher to 2.0060, the trader can re-adjust his stop loss to 2.0040 (40 points locked). This technique is also know as the basic of Trailing Stop feature.

NOTE : After filling Take Profit and Stop Loss levels, the datas are saved in Broker’s server. Trader does not need to connect his/her PC to internet since take profit and stop loss levels will remain active in Broker’s server.

Position Profit Target Stop Loss
Buy (Long) Higher than Open Price (based on bid price) Lower than Open Price (based on bid price)
Sell (Short) Lower than Open Price (based on offer price) Higher than Open Price (based on offer price)

Trailing Stop is an automatic stop order adjustment feature in order to protect profit earned. Trailing stop will move stop loss upward (Long Position) or downward (Short Position) within range set by trader. Trailing Stop is a development of stop loss function.
Trailing Stop will be activated whenever positions opened have exceeded a specific minimum level of profit.

For example :
Trailing stop will remain in pending state while current floating profit has not exceeded 15 points (for a broker with minimum 15 points trailing stop level).

(NOTE : Trailing stop feature is commonly executed at traders computer. Connection problem or other computer failure will prevent trailing stop from functioning correctly)

Traders have to aware that his position is still risky while his profit has not exceeded minimum trailing stop level allowed. In addition traders may use BOTH stop loss and trailing stop to limit trading risk.

Example :
Buy EUR/USD 1.2050, Stop Loss 1.2000, Trailing Stop 15 points. While current BID price is reaching 1.2070 (20 points profit), trailing stop will adjust stop loss to 1.2055 (1.2070 subtracted by 15 points). In this case, trader have got +5 points profit locked by stop loss (20 point profit – 15 points trailing stop = +5 points locked).

Case A : When market moves downward from 1.2070 to 1.2055, the position will be liquidated at +5 points profit. At this level, trailing stop will prevent a position falling to negative profit.

Case B : If market hikes from 1.2070 to 1.2095 (instead of falling to 1.2055). The trader will get profit of 45 points (1.2050 initial open price to current price level at 1.2095), in such case, trailing stop will adjust stop loss to 1.2080 ( 45 points profit – 15 trailing stop level = +30 points locked)

Basic Forex Order Types
There are 2 basic order types to trade currencies. They are called Market Order and Pending Orders.
  1. Market Order is an order executed at current market price.
    Opening Buy / Long position at market price means trader will open at the current Ask price. Opening Sell / Short position at market price means trader will open at the current Bid price.

    Example : Trader will Buy EUR/USD at market price, current forex quote shows Bid / Ask = 1.2934 / 1.2938. This means brokerage agrees to buy EUR/USD from trader at 1.2934 and sells to trader at 1.2938. (Also can be said : Trader buys EUR/USD from brokerage at 1.2938 and sells to brokerage at 1.2934)

  2. Stop Order and Limit Order (Pending Order) : Orders to open Buy or Sell only if the price set is reached (hit). Pending orders remain active if the price ordered have not been reached. Traders can set the expiration date and time as they wish.
    There are two types of Pending Order : Stop Order and Limit Order.
There are four Pending Order combinations:
  1. Buy Stop
    To buy ABOVE current Market Price, use Buy Stop.
    In this case, Buy order price must be HIGHER than current Market price.

    Example :
    Current price is at 1.2000, and you want to Buy (LONG) only if the market hits 1.2050. You can set a Buy Stop at 1.2050 (Note : Opening Buy/Long using ASK Price !)

  2. Sell Stop
    To sell BELOW current Market Price, use Sell Stop.
    In this case, Sell order price must be LOWER than current Market price.

    Example :
    Current price is at 2.0000, and you want to Sell (SHORT) only if the market hits 1.9550. You can set a Sell Stop at 1.9550 (Note : Opening Sell/Short using BID Price !)

  3. Buy Limit
    To buy BELOW current Market Price, use Buy Limit
    In this case, Buy order price must be LOWER than current Market price.

    Example :
    Current price is at 2.0000, and you want to Buy (LONG) only if the market hits 1.9950. You can set a Buy Limit at 1.9950 (Note : Opening Buy/Long using ASK Price !)

  4. Sell Limit
    To sell ABOVE current Market Price, use Sell Limit.
    In this case, Sell order price must be HIGHER than current Market price.

    Example :
    Current price is at 1.2000, and you want to Sell (SHORT) only if the market hits 1.2050. You can set a Sell Limit at 1.2050 (Note : Opening Sell/Short using BID Price !)
Order Type Buy (Long) Sell (Short)
Market Buy at current Ask Price Sell at current Bid Price
Stop Pending Order Buy Above Current Price (Open with Ask) Sell Below Current Price (Open with Bid)
Limit Pending Order Buy Below Current Price (Open with Ask) Sell Above Current Price (Open with Bid)


Pending Order Expiration
  1. GTC (Good Till Cancelled)
    Good Till Cancelled means pending order will remain active until cancelled. GTC is the default setting of Pending Order Expiration
  2. GTD (Good Till Date)
    Good Till Date means pending order will remain active until a specific time set. If the date set is reached, pending order will be cancelled
  3. OCO (Order Cancels Other)
    Order Cancels Other : Trader orders 2 pending orders at the same time. Once one of pending order is executed, the other one will be cancelled.
Margin Calculation

There are 3 groups of Currency Pair :
  1. Direct Rates
    Currency Pairs at which USD operating as counter currency (USD is located at the right side of currency pair), example : GBP/USD, EUR/USD, AUD/USD, NZD/USD
  2. Indirect Rates
    Currency Pairs at which USD operating as base currency (USD is located at the left side of currency pair), example : USD/JPY, USD/CHF, USD/CAD
  3. Cross Rates
    Currency Pairs which do not involve USD, example : GBP/JPY, EUR/JPY, AUD/JPY, EUR/GBP, GBP/CHF
How to Calculate Margin of Direct Rates (GBP/USD, EUR/USD, AUD/USD, and NZD/USD):

Margin Percentage x Contract Size x Lot x Current Price = Margin

Example :
Sell 3 mini lot GBP/USD at Bid 2.0000 (Note : Open Sell uses bid price !)
0.01 x 10.000 x 3 x 2.0000 = $600 (Leverage 1:100)
0.002 x 10.000 x 3 x 2.0000 = $120 (Leverage 1:500) => Leverage 1:500 has less margin requirement than Leverage 1:100 !

How to Calculate Margin of Indirect Rates (USD/JPY, USD/CHF, dan USD/CAD):

Margin Percentage x Contract Size x Lot = Margin

Example :
Buy 2 mini lot USD/JPY at Ask 110.00 (Note : Open Buy uses Ask price !)
0.01 x 10.000 x 2 = $200 (Leverage 1:100)
0.002 x 10.000 x 2 = $40 (Leverage 1:500) => Leverage 1:500 has less margin requirement than Leverage 1:100 !

How to Calculate Profit and Loss of Cross Rates (GBP/JPY, EUR/JPY, AUD/JPY, EUR/GBP,and GBP/CHF):

Margin Percentage x Contract Size x Lot x Current Median Price* = Margin

*Current Median Price : Current BASE Currency’s Bid and Ask Average

Median Price = (Bid + Ask ) / 2

(Note : Base Currency is the Currency located at the left side of the pair. Example : EUR/GBP Pair => EUR is BASE Currency, GBP is QUOTE Currency)

Example :
Buy 1 mini lot EUR/GBP at Ask 0.8020. Quote of EUR/USD : 1.5800/02 (EUR is the Base Currency, so we need to use the Base Currency Pair of EUR, which is EUR/USD)

EUR/USD Median = (1.5800 + 1.5802) / 2 = 1.5801

0.01 x 10.000 x 1 x 1.5801 = $158.01 (Leverage 1:100)
0.002 x 10.000 x 1 x 1.5801 = $31.60 (Leverage 1:500) => Leverage 1:500 has less margin requirement than Leverage 1:100 !

From the illustrations above, we can see the Larger Leverage Ratio Used, the Smaller Margin Used.

What is a Margin Call ?
Margin call is liquidation procedure executed by broker when trader’s margin falls below broker’s minimum margin requirement. Margin call plays a role to protect trader’s balance from falling to minus balance when there is no enough margin to hold losses. Usually brokerage will liquidate open positions immediately one by one until trader’s margin is enough to cover losses.

There are 2 approaches used to determine Margin Call :
  1. Margin Level
    Margin level system is used at MetaTrader Platform. (Please try FCMarket’s demo accounts at http://www.fcmarket.com/demo.php in order to fully understand margin level calculation at MetaTrader Platform)

    Margin level calculation formula :

    Margin Level (in %) = Equity / Used Margin

    Equity = Used Margin + Free Margin

    At the time of no positions opened, Balance = Equity. While Profit/Loss=0, Balance will be the same as Equity. (Please see Equity Calculation Formula above !).

    Free Margin is free withdrawable margin while there are open positions (note : Please leave enough margin to hold losses and prevent Margin Call !)

    Lets say, a broker detemines Margin Call by 5% Margin Level (example : FCMarket.com), if Equity = Used Margin x 5%, Margin Call will happen. (open positions immediately closed one by one until trader’s margin is enough to cover losses).

    Using MetaTrader Platform, a trader does not need to calculate Margin Level manually. Each time position is opened, Margin Level percentage can be monitored at “Trade” Tab inside MetaTrader. By seeing at “Trade” tab, it is easier for us to know current Margin Level percentage. All we need to do is maintain margin level at above Broker’s minimum Margin Level (example = Margin Level should be more than 5%). Margin call will happen if Margin Level is equal to or less than Broker’s minimum requirement.

  2. Equity = Used Margin (Equity – Used Margin + Profit – Loss = 0)
    This system calculates Margin Call based on :

    Equity – Used Margin + Profit – Loss = 0
    (This system actually has 100% Margin Level if you are using MetaTrader system since when Used Margin = Equity, Margin Call happens)

    Example :
    Trader’s initial deposit $300. He opened 1 mini lot (10.000 units) GBP/USD. Margin requirement will be : 10000 (mini lot) x 0.002 (leverage 1:500) x 2.0000 = $40. Margin (good faith deposit) temporarily held by broker is $40.
Margin Level System Calculation:
Broker’s Margin Level = 5%.
When Equity is approaching 5% Margin Level = 5% x Used Margin = 5% x $40 = $2. Margin Call will be generated if trader’s equity is falling to $2 or less. This also means $300 - $2 = $298 margin left to hold losses.

Equity = Used Margin Calculation:
While Equity is approaching 100% Margin Level (or when Equity = Used Margin). Margin Call will be generated if trader’s equity is falling to $40 or less. This also means $300 - $40 = $260 margin left to hold losses.

Balance Leverage Used Margin Available Margin Number of pips to hold loss
$1000 1:100 $1000 (1 Standard Lot) 0 Margin Call !
$2000 1:100 $1000 (1 Standard Lot) $1000 100 pips*
$2000 1:500 $200 (1 Standard Lot) $1800 180 pips**

* Number of pips to hold loss = Available Margin / Pip value (assuming the pair is x/USD 1 standard lot, so pip value = $10/pip)

The example above shows that we need to be very careful dealing with margin to avoid margin call. As you can see, higher leverage will help you hold more losses (100 pips* compared to 180 pips**)

What is a Swap (Rollover) ?
Interest / Swap / Rollover refers to the interest traders may earn or be charged for holding open positions more than 1 day. Forex market calculates interest on a daily basis. At the end of each trading day at 5:00 pm New York timezone, traders will see the interest charged or interest income credited to their accounts To convert New York timezone to your local timezone please visit : http://www.timeanddate.com/worldclock/timezone.html?n=179

When opening forex transactions, the actual value date is two days forward. A deal which is done on Monday is for Wednesday’s value. A deal done on Friday is for Tuesday’s value (Saturday and Sunday are not couted), and so on. Please note : On Wednesday the amount of swap is multiplied three times (tripled) to compensate weekend holidays which swap is not charged.

How to Calculate Swap:
Traders will earn positive swap if the currency bought has greater swap rate than borrowed one.

Example :
USD/JPY Pair. USD Swap Rate = 5.25% , JPY Swap Rate = 0.5%
Buy USD/JPY means a trader is buying USD by borrowing JPY. Since bought currency’s swap rate (USD) is greater than borrowed currency’s swap rate (JPY), the trader will earn interest income : 5.25% - 0.5% = 4.75% When a trader Sell USD/JPY (means borrowing USD to buy JPY), the trader will be charged by interest fee : -5.25% + 0.5% = -4.75%

Example 2:
EUR/USD Pair. EUR Swap Rate = 3.75%, USD Swap Rate = 5.25%
Buy EUR/USD means a trader is buying EUR by borrowing USD. Since bought currency’s swap rate (EUR) is smaller than borrowed currency’s swap rate (USD), the trader will be charged by interest fee : 3.75% - 5.25% = -1.5% When a trader Sell EUR/USD (means borrowing EUR to buy USD), the trader will earn interest income : -3.75% + 5.25% = 1.5%

Forex Broker usually provides a list of daily swap rates for every currency pairs available. Traders could find interest fee / earning based on Buy or Sell positions they will trade. (swap is usually in $ or pips value). If the swap value is quantified in pips, traders need to convert pip to dollar by calculating pip value of corresponding currency pair.

forex swap list

At the image above, we can see that by holding Buy GBP/USD for more than 1 day, a trader will earn $12.81/day (Standard Lot). To check swap rate for a specific currency at MetaTrader Platform : Click right mouse button at forex quotes list => Symbols => Select desired currency pair => Properties

Hedging and Averaging Techniques
Hedging is a technique to minimize unwanted risk by opening opposite trading positions. Usually hedging strategy is used to limit risk without cutting losing positions. (as sometimes traders do not want to use Stop Loss).
By using hedging, a trader is able to mantain loss amount at a constant range (locking).

Example :
A trader ordered Buy EUR/USD 1 lot. Unfortunately, market went against the trader’s position (downward). At the moment his position reached -20 points floating loss, he can order Sell EUR/USD 1 lot to lock losing position at -20 points. This action is called hedging, and no matter what direction the market goes, upward or downward, his loss will be locked at -20 points. (assuming there is no spread charge)

Averaging is a technique to minimize unwanted risk by opening another position with the same direction at different price level.
Averaging strategy’s objective is to minimize risk by averaging more than 1 positions which are opened at different prive levels.

Example :
A trader ordered Buy EUR/USD 1 lot at 2.0100, unfortunately, market went against the trader’s position (downward) to 2.0000. Now he suffered 100 points floating loss.

In this scenario, the trader could use Averaging technique to minimize the risk by opening Buy EUR/USD 1 lot at 2.0000. At this point there were 2 open trades : Buy EUR/USD 1 lot at 2.0100 (-100 points loss) and Buy EUR/USD 1 lot at 2.0000. (0 point)(assuming there was no spread charge).

A few hours later, market moved to 2.0050, the trader would have 1 trade at -50 points loss and another trade at +50 points profit. This point (2.0050) is BEP level (Break Even Point) of both trades. Once, the price goes higher than 2.0050, the trader will earn profit.

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