By Martin Maier
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
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
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$.
The difference between the bid and the ask price is referred
as the spread. In the example above, the spread is 3 or 3
Since the US dollar is the centerpiece of the FOREX market, it
is normally considered the 'base' currency for quotes. In the
"Majors", this includes USD/JPY, USD/CHF and USD/CAD. For
currencies and many others, quotes are expressed as a unit of
USD per the second currency quoted in the pair.
For example a quote of USD/CHF 1.3000 means that fore one U.S.
dollar you receive 1.30 Swiss Francs. or in other words, you
receive 1.30 Swiss Franc for each 1 US$.
When the U.S. dollar is the base unit and a currency quote
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
you might see a quote such as EUR/USD 1.2080, meaning that for
EURO you receive 1.2080 U.S. Dollars.
In these three currency pairs, where the U.S. dollar is not
base rate, a rising quote means a weakening dollar, as it now
takes more U.S. dollars to equal one Euro, British pound or an
In other words, if a currency quote goes higher, that
the value of the base currency. A lower quote means the base
currency is weakening.
Currency pairs that do not involve the U.S. dollar are called
cross currencies, but the calculation is the same. For
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
Keep in mind 2 very important rules:
RULE # 1) Cut your LOOSING trades and let your WINNING trades
YOU WILL HAVE LOSING TRADES. Every FOREX trader has. The
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
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
RULE 2) NEVER EVER trade FOREX without placing a Stop Loss
PLACE a STOP order, right along with your ENTRY order, via
online trading station, to prevent potential losses.
Before initiating any trade, you have to calculate at what
point ( price) you would be wrong, because the market changed
direction, and would want to cut your losses.
To make profits, in the FOREX, a trader can enter the market
with a *buy position* (known as going "long") or a *sell
position* (known as going "short").
As an example let's assume you've been studying the EURO. The
EURO is paired first with the U.S. dollar or USD.
Your trading methods, rules, strategies, etc., tell you that
the EURO will rice in the next 2 weeks, So you buy the EUR/USD
pair meaning you will simultaneously buy EUROS, and SELL
You open up your excellent trading station software (provided
to you for free by Fenix Capital Management, LLC
www.fenixcapitalmanagement.com ) and you see that the EUR/USD
pair is trading at:
As you you believe that the market price for the EUR/USD pair
will go higher, you will enter a *buy position* in the market.
As an example, lets say you bought one lot EUR/USD at 1.2013.
As long as you sell back the pair at a higher price, then you
To illustrate a typical FX SELL trade, consider this scenario
involving the USD/JPY currency pair:
REMEMBER Selling ("going short") the currency pair implies
selling the first, base currency, and buying the second, quote
currency. You sell the currency pair if you believe the base
currency (USD) will go down relative to the quote currency
(JPY), or equivalently, that the quote currency (JPY) will go
up relative to the base currency (USD).
HOW TO CALCULATE PROFIT OR LOSS?
The Profit Calculations, on the Short-sell trade scenario
below, may seem somewhat complicated if you've never been in
the FOREX market before, but this process is continually
calculated through your broker trade station (software). I
you this process below so you can SEE how a PROFIT might
The current bid/ask price for USD/JPY is 107.50/107.54,
you can buy $1 US for 107.54 YEN, or sell $1 US for 107.50
Suppose you think that the US Dollar (USD) is overvalued
against the YEN (JPY). To execute this strategy, you would
Dollars (simultaneously buying YEN), and then wait for the
exchange rate to rise.
Your trade would be the following: you sell 1 lot USD (US
$100,000) and you buy 1 lot JPY (10,754.000 YEN). (Remember,
0.25 % margin, your initial margin deposit for this trade
be $ 250.)
As you expected, USD/JPY falls to 106.50/106.54, meaning you
can now buy $1 US for $106.54 Japanese YEN or sell $1 US for
Since you're short dollars (and are long YEN), you must now
dollars and sell back the YEN to realize any profit.
You buy US $100,000 at the current USD/JPY rate of 106.54, and
receive 10,654,000 YEN. Since you originally bought (paid for)
10,754,000 YEN, your profit is 100,000 YEN.
To calculate your P&L in terms of US dollars, divide 100,000
the current USD/JPY rate of 106.54
Total profit = US $938.61
About The Author: Veteran Trader Martin Maier is the Founder
www.fenixcapitalmanagement.com He is the developer of
various futures and commodities trading programs and his
systems have been ranked and rated by various large American
Investment Profile Rating Companies such as STAR and MAR.