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Are You Winning? Calculating FOREX Profits and Losses
When trading currency you deal with much smaller divisions than when dealing with actual cash. For example the smallest denomination of US is currency is the penny (.01) but on the FOREX market it can be traded down to .0001. The smallest division that a currency can be traded at is known as a pip. A pip is short for Price Interest Point; this is sometimes also referred to as points. Currencies are traded in very large lots so even a small change in the value can create a significant profit or loss. If you are trading 0,000 in US dollars a single pip is worth so a change of 60 pips or 6/10 of one cent will generate a profit or loss of 0 depending on the direction of the move.
When trading currencies various lot sizes are not unusual but 100,000 units are considered a standard lot. A single unit is what ever the name of that particular currency is for example when trading Japanese currency a single unit is the Yen. Some trades are done in lots of 10,000 these are commonly referred to as mini lots. Even though lots of various sizes are possible the majority of trades involve standard lots of 100,000 units.
The size of the pip is based on the currency type; different types of currencies have different pip sizes. For example the Yen pip is 0.01 where as the US dollar has a pip of 0.0001. Both the type of currency as well as the size of the lot determines the actual value of the pip. Using the US dollar as the quote currency (second currency) such as CAD/USD then the pip always equals for a standard lot and for a mini lot. For other currencies it is easiest to use a pip value calculator to determine the pip value.
In the FOREX market there are a variety of order types available for making trades. You need to have a solid working knowledge of the different order types to be a successful FOREX trader.
Market Orders - This is simply an order to buy or sell at the current market price. Market orders can be used to enter or exit a position. Market orders can be dangerous during times of high market volatility. The price can change significantly between the time that you enter your order and the time when it is actually recorded or executed. The amount that the market changes between the time that an order is placed and when it is executed is known as slippage. Depending on market conditions slippage can result in the gain or loss over several pips.
Limit Order - This is an order to buy or sell at a specific price. These are used to help you control your trades without having to constantly monitor the market. If you have a sell limit in place for a price higher than the current rate your order will be executed as soon as the market rate rises to match your limit. If you have a buy order in place to purchase a currency at below the current market price your order will not execute until the current rate drops to match your limit.
Stop Order - These are used to limit your losses if the market moves in the opposite direction of what you are expecting. This will cause your currency to be sold at below the market price or purchased above the current price. A stop loss is executed when the market crosses the threshold set by the trader when placing the order.
To be successful on the FOREX market it is essential that you learn to figure profit and losses and to use the various order types to their fullest potential.
About the Author: By Steve Welker
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