forex-online-trading

Foreign Currency Conversion

On a foreign currency conversion table the conversion rates between currencies look something like this :

USD / JPY 117.77 / 117.81

In this example USD stands for US dollar and JPY is Japanese yen. The letters used for identifying currencies are 3-digit codes as specified by International Standard ISO 4217. Some of the most frequently traded currencies are :

USD US Dollar
EUR Euro
JPY Japanese Yen
GBP British Pound Sterling
CHF Swiss Franc

The first value in the conversion rates is the bid price. In our example this value is 117.77. In case you wish to sell USD in exchange for JPY the market is prepared to give you JPY 117.77 for each US dollar you are selling.

The second value is the ask price, which is 117.81 in our example. This is the price the market will charge you if you buy USD with JPY. For each US dollar you buy from the market you will have to spend JPY 117.81.

The exchange rates are quoted real-time and are applicable for the duration they are displayed which may be just a few seconds. As soon as new values appear, those new values become applicable until they are replaced with yet another set of values.
There is a difference between ask and bid values which is called the spread. In our example the spread is 117.81 – 117.77 = 0.04

The foreign exchange is traded in lots. The most commonly used lot size is USD 100,000.

Let us consider this example of conversion rates between US dollar and Swiss franc :

USD / CHF 1.2143 / 1.2148

In the parlance of foreign exchange trading 1/100th percent of the value is called a pip – percentage in points. This will be 0.0001. In this example the spread between bid and ask rates is 5 pips ( 1.2148 – 1.2143 = 0.0005, or 5 pips ).

In case of JPY one pip is 0.01, and not 0.0001 as in the case of other currencies.
Quite often, in display of exchange rates, 3rd and 4th digits after the decimal point are shown prominently.

Let us take another example :

USD / JPY 116.70 / 116.75

Let us say a trader starts with USD 100,000 lot. The trader uses this lot to buy Japanese Yen at JPY 116.75 to a US dollar. This is the “open” position held by the trader at this stage. The trader believes that the price of yen will change in his favour and gives instructions to sell his yen when the bid rate reaches 116.95. (He places a limit order.)

After sometime the following rate is displayed :

USD / JPY 116.95 / 117.00

The program used by the trader for his trading will automatically sell his yen at JPY 116.95 to a dollar as soon as this value is attained.

In this deal the difference between the two rates is 116.95 – 116.75 = 0.20 or 20 pips.

The value of each pip in terms of US dollars for the lot size will be

0.01 / 116.95 * 100,000 = USD 8.55 per pip

The trader has made 20 pips, therefore his profit will be

USD 8.55 / pip * 20 pips = USD 171

In forex trade it is customary to indicate profit and loss in terms of pips.

Ok then, I'll be back soon.

posted by Sanjay Johari @ 9:45 PM