Tuesday, November 3, 2009

4.4 Forex Calculus : Calculating Units Available

Before initiating a new trade, it is always advantageous to know
 the maximum number of units that you can safely trade without
risking a margin call based upon your current account balance.
Most trading platforms provide an online utility that calculates
this information.
Enter the following data fields to calculate the maximum number of units
to buy or sell:
Margin available. This is the amount in your margin account you
want to earmark for the current trade.

Margin percent. This is your broker’s margin percentage for leveraging
Currency pair. Select the corresponding currency pair. In this example,
select EUR/USD.
Current price. Enter the current ask price in the currency pair.
Conversion rate. If the quote currency in the selected currency pair is
USD, then enter “1.”

The formula to calculate the maximum units that can be traded is:
Units Available 
=100 x Margin Available x Rate / (Current Price x Margin Percent)

If USD is the base currency, then this reduces to:
Units Available = 100 x Margin Available / Margin Percent
Cross rates can be handled in the same fashion by simply manipulating
the conversion rate.
Note: Always decrease the units available slightly to avoid a
margin call. Recommended 10 percent.

4.3.7 Forex Calculus : Calculating Profit and Loss - Scenario 6

Non-USD Cross Rates (Base/USD) In the previous example,
the USD was the base currency in the conversion pair (USD/JPY).
Now USD is the quote currency of the conversion pair (GBP/USD).
So, in this case we want to buy 20000 units of EUR/GBP.
The entry price is 0.6754 and the exit price is 0.6772.
So, the price change is 0.0018.
The Conversion Rate now is the current price of the
GBP/USD pair. The reversal of the role of the U.S. Dollar in
the conversion pair (GBP/USD) requires another change
 in the profit formula:
Profit in USD = Price Change x Units Traded x Rate
$19.05 = 0.0018 x 20000 x 1.8902

Remember that when USD is the quote currency of the
conversion pair, you must multiply the rate. If USD is the base
currency of the conversion pair, then divide the rate.
You may have noticed there was no mention of transaction 
costs in the  six scenarios given. The broker always subtracts 
the transaction cost at the moment the trade is initiated; 
therefore transaction costs do not affect the above calculations.

Monday, November 2, 2009

4.3.6 Forex Calculus : Calculating Profit and Loss - Scenario 5

Non-USD Cross Rates (USD/Quote) 
Most experienced traders can mentally perform the arithmetic
 in these examples. It just takes practice. However, we
must now tackle cross rates, currency pairs where neither
 currency is the U.S.Dollar. Obviously the profit in pips 
will be initially expressed in terms of the quote (second) 
currency of the cross rate pair. The solution is simple:
Look up the current price of the currency pair containing
 USD and the quote currency of the cross rate pair.
Let's suppose we bought 10000 units of CHF/JFY.
Entry price is 85.46. Exit price 86.86. So, the price
change is 0.40.

The Conversion Rate of 105.32 is actually the cur-
rent price of the USD/JPY pair.
The adjusted profit formula  for this cross rate trade is:
Profit in USD = Price Change x Units Traded / Conversion Rate
$37.98 = 0.40 x 10000 / 105.32

4.3.4 Forex Calculus : Calculating Profit and Loss - Scenario 4

USD Is the Base Currency (Loss)
This example is arithmetically identical to the previous example,
except that a small loss was incurred. We purchased 5,000
units of the USD/CAD pair at 1.3152 and set a stop-loss limit

order at 1.3142, which, unfortunately, was triggered .
Using the same adjusted profit formula as in the previous example,
Profit in USD = Price Change x Units Traded / Exit Price
we find:
-$3.80 =-0.0010 x 5000 / 1.3142
Note: Always keep your losses small.

4.3.3 Forex Calculus : Calculating Profit and Loss - Scenario 3

USD Is the Base Currency (Profit)
If the quote (second) currency is not the U.S. Dollar,
then profit or loss must be converted to U.S. Dollars.
For example, a 35-pip profit in the USD/JPY pair means
that the 35 pips are expressed in Japanese Yen.
Therefore, one extra step is required to convert Yen to Dollars:
Conversion Rate.
If USD is the base currency of the currency pair
being calculated, then divide the profit or
loss by the exit price.
This simply converts the pip profit expressed as Yen 
to a profit expressed as Dollars.
 Thus, when calculating currency pairs where the base
(first) currency is the U.S. dollar, the profit formula must
be adjusted as follows:
Profit in USD = Price Change x Units Traded / Exit Price
or, specifically:
$33.09 = 0.35 x 10000 / 105.77
Obviously, all U.S. brokers perform this simple conversion
to U.S. Dollars before adding profits to your margin account.

4.3.2 Forex Calculus : Calculating Profit and Loss - Scenario 2

USD Is the Quote Currency (Loss) 
 This time with the GBP/USD currency pair.
In this instance, we initiated a 30,000-unit short (sell) trade in the
GBP/USD pair at 1.8863 and, sadly, it advanced against our hopes.
We exited at 1.8883, losing 20 pips. Since the quote currency 
(the second currency) is USD, we know the conversion rate is 1. 
Thus using the profit formula
Profit in USD = Price Change x Units Traded
we find that our profit is actually a loss:
-$60.00 =-0.0020 x 30000
If the above calculations are still causing some confusion,
 then reread, “The FOREX Lexicon.” As promised
before, these calculations only require 
the four simple arithmetic functions: 
addition, subtraction, multiplication, and division. 
No exponents, logs, or trig functions.
But this information must be completely clear before proceeding.
Keep in mind that it is your money at stake.

4.3.1 Forex Calculus : Calculating Profit and Loss - Scenario 1

USD Is the Quote Currency (Profit)
Currency pair.           The default is the EUR/USD pair.
Position.                     Choose either “buy” or “sell.”
                                   The default is “buy.”
Number of units.       This is the individual number of units
                                   and not the number of lots or mini-lots.
                                   A full lot should be entered as “100000”
                                   and a mini-lot as “10000.”
Entry price.               This is the entry price regardless if 
                                   the trade was a market order or
                                   a limit order.
Include the decimal point.
Exit price.                  This is the liquidation price regardless 
                                   if the trade was manually exited or a
                                   limit order was triggered.
Conversion rate.       This entry is necessary to convert any
                                   profit or loss to U.S.Dollars
                                   if the quote currency  is not USD.
                                  (the second one in the pair)
                                   In this example, USD is the quote currency.

 In this example we bought a mini-lot (10,000 units) of the
EUR/USD pair at 1.2563 and sold at 1.2588, netting a clear
profit of 25 pips (price change times pip factor,
or 0.0025 x 10,000). The price change is simply:
Price Change = Exit Price - Entry Price
The pip factor is the number of pips in the monetary unit of quote
currency. There are 10,000 pips in one U.S. Dollar and,
conversely, a single pip equals $0.0001.
The pip factor is therefore 10,000.
Profit in Pips = Price Change x Pip Factor
When the quote currency is the USD, profit or loss is calculated very
simply as:
Profit in USD = Price Change x Units Traded
.In our scenario, this equates to:
  $25.00 = 0.0025 x 10,000

4.3 Forex Calculus : Calculating Profit and Loss

Many FOREX trading platforms offer their clients a variety
of online utilities that assist the investor in his or her trading
Because all profits are expressed in U.S. dollars, a key factor
in the calculation of profit and loss is the currency pair and 
whether the USD is the base currency or the quote currency,
or if the currency pair is a non-USD cross rate.
Remember that the first currency in a currency pair is called 
the base currency (determines the number of units traded)
and the second is called the quote currency 
(determines the pip values of each price change).
Throughout the global spot currency market the term current price
is normally defined as:

Current Price =(Ask Price + Bid Price)/2

TIP: Always make sure that what you mean by any term 
is the same as what your broker-dealer means by that term.
Definitions do vary, usually slightly.
But even a small difference can lead to an error.

4.2 Forex Calculus : Pip Values

A pip is the smallest price increment that any currency pair
can move in either direction. In the FOREX markets, profits
are calculated in terms of pips first, then dollars second.
                        USD = Quote Currency
                EUR/USD               .0001 USD
                GBP/USD               .0001 USD
               AUD/USD               .0001 USD
                        USD = Base Currency
               USD/JPY                .01 JPY
               USD/CHF               .0001 CHF
               USD/CAD              .0001 CAD
                       Non-USD Cross Rates
               EUR/JPY                .01 JPY
               EUR/CHF               .0001 CHF
               EUR/GBP               .0001 GBP
               GBP/JPY                .01 JPY
               GBP/CHF               .0001 CHF
               CHF/JPY                .01 JPY

Currencies           1 Pip Value Per Full Lot (100,000 units)
EUR/USD           EUR 100,000 x .0001= USD 10.00
GBP/USD           GBP 100,000 x .0001= USD 10.00
AUD/USD          AUD100,000 x .0001= USD 10.00
USD/JPY            USD 100,000 x .01 = JPY 1,000
                                   / USDJPY spot (105.50) = USD 9.47
USD/CHF          USD 100,000 x .0001= CHF 10.00 /
                          USDCHF spot (1.2335) = USD 8.11
USD/CAD         USD 100,000 x .0001= CAD 10.00 /
                          USDCAD spot (1.3148) = USD 7.61
EUR/JPY           EUR 100,000 x .01 = JPY 1,000 /
                          USDJPY spot (105.50) = USD 9.47
EUR/CHF          EUR 100,000 x .0001= CHF 10.00 /
                          USDCHF spot (1.2335) = USD 8.11
EUR/GBP          EUR 100,000 x .0001= CHF 10.00 x
                          GBPUSD spot (1.8890) = USD 5.2
GBP/JPY           GBP 100,000 x .01 = JPY 1,000 /
                          USDJPY spot (105.50) = USD 9.47
GBP/CHF          GBP 100,000 x .0001= CHF 10.00 /
                          USDCHF spot (1.2335) = USD 8.11
CHF/JPY           CHF 100,000 x .01 = JPY 1,000 /
                          USDJPY spot (105.50) = USD 9.47
 Approximate USD values for a one-pip move per contract
in the major currency pairs are shown above, per 100,000
units of the base currency.
On a typical day, actively traded currency pairs like EUR/USD
and USD/JPY can fluctuate 100 pips or more. 
The above table is based upon a margin requirement of 
100 percent (leverage = 1:1). To calculate actual profit (or
loss) in leveraged positions, multiply the pip value per 100k times
the leverage ratio (margin percentage divided by 100).
Note that the EUR/GBP cross rate pair above uses multiplication
with the USD spot price instead of division. 

This is because the USD is the quote (second) currency 
in the spot conversion pair.

4.1 Forex Calculus : Leverage and Margin Percent

Some brokers describe their gearing in terms of a leverage ratio
and others in terms of a margin percentage.
The simple relationships between the two terms are:
Leverage = 100 / Margin Percent
Margin Percent = 100 / Leverage

Leverage is conventionally displayed as a ratio, 
such as 20:1 or 50:1.
In the examples that follow which require leverage,
will be use only the number on the left side of the ratio—that is,
20 or 50—since the number on the right side is always 1.

4.0 Forex Calculus : Introduction

Profit and Loss (P&L) for every open position is calculated
in real-time on most brokers’ trading platforms.
 But there will be many times when you will want to make
them “on-the-fly” as in the instance of verifying that an anticipated
position meets your money management criteria.
(For example in writing your own custom expert advisor for
These calculations provide mission-critical information about
the relationship between several key factors: 
pip values, dollar values, leverage, and margin.

3.16 Forex Lexicon : Rollover

Rollover is the process whereby the settlement of an open trade
is rolled forward to another value date. The cost of this process
is based on the interest rate differential of the two currencies.

3.15 Forex Lexicon : Transaction Cost

The critical characteristic of the bid/ask spread is that it is
also the transaction cost for a round-turn trade. Round-turn
means both a buy (or sell) trade and an offsetting sell (or buy)
trade of the same size in the same currency pair.
In the case of the EUR/USD rate
EUR/USD 1.2604/07 , the transaction cost is three pips.
The formula for calculating the transaction cost is:
Transaction Cost = Ask Price - Bid Price

3.14 Forex Lexicon : Quote Convention

Exchange rates in the FOREX market are expressed
using the following format:

Base Currency/Quote Currency Bid/Ask

EUR/USD                                     1.2604/07
GBP/USD                                     1.5089/94
CHF/JPY                                      84.40/45

Normally only the final two digits of the bid price are shown.
If the ask price is more than 100 pips above the bid price, 
then three digits will be displayed to the right of the slash mark 
(that is, EUR/CZK 32.5420/780).
This only occurs when the quote currency 
is a very weak monetary unit.

3.13 Forex Lexicon : Bid/Ask Spread

The spread is the difference between the bid and ask price.
The “big figure quote” is the dealer expression referring to
the first few digits of an exchange rate.
These digits are often omitted in dealer quotes.
For example, a USD/JPY rate might be 117.30/117.35, 
but would be quoted verbally without the first three digits as “30/35.”

3.12 Forex Lexicon : Ask Price

The ask is the price at which the market is prepared to sell 
a specific currency pair in the FOREX market. At this price,
the trader can buy the base currency.It is shown on the right side
of the quotation. For example, in the quote USD/CHF 1.4527/32,
the ask price is 1.4532;
meaning you can buy one U.S.Dollar for 1.4532 Swiss Francs. 
The ask price is also called the offer price.

3.11 Forex Lexicon : Bid price

The bid is the price at which the market is prepared to buy
a specific currency pair in the FOREX market. At this price,
the trader can sell the base currency. 
It is shown on the left side of the quotation.
For example, in the quote USD/CHF 1.4527/32, 
the bid price is 1.4527; meaning
you can sell one U.S. Dollar for 1.4527 Swiss Francs.

3.10 Forex Lexicon : Leverage

Leverage is the ratio of the amount used in a transaction 
to the required security deposit (margin). It is the ability
to control large dollar amounts of a security with a
comparatively small amount of capital. Leveraging
varies dramatically with different brokers,
ranging from 10:1 to 100:1. 
Leverage is frequently referred to as gearing. 
The formula for calculating leverage is:

Leverage = 100/Margin Percent

3.9 Forex Lexicon : Margin

When an investor opens a new margin account with a
FOREX broker, he or she must deposit a minimum 
amount of money with that broker. This minimum
varies from broker to broker and can be as low as
$100.00 to as high as $100,000.00.
Each time the trader executes a new trade, 
a certain percentage of the account balance in 
the margin account will be earmarked as the initial
margin requirement for the new trade based upon 
the underlying currency pair, its current price, and
the number of units traded (called a lot). The lot size
always refers to the base currency.
An even lot is usually
a quantity of 100,000 units, but most brokers permit investors
to trade in odd lots (fractions of 100,000 units).

3.8 Forex Lexicon : Ticks

Just as a pip is the smallest price movement (the y-axis),
a tick is the smallest interval of time (the x-axis) that 
occurs between two trades. When trading the most active
currency pairs (such as EUR/USD or USD/JPY) during peak
trading periods, multiple ticks may (and will) occur within 
the span of one second.
When trading a low-activity minor cross pair 
(such as the Mexican Peso and the Singapore Dollar), 
a tick may only occur once every two or three hours.
Ticks, therefore, do not occur at uniform intervals of time.
  Fortunately, most historical data vendors will “group” 
sequences of streaming data and calculate the 
open, high, low, and close over regular time intervals 
(1-minute, 5-minute, 30-minute, 1-hour, daily, and so forth).

3.7 Forex Lexicon : Pips

A pip is the smallest unit of price for any foreign currency.
Nearly all currency pairs consist of five significant digits and most pairs
have the decimal point immediately after the first digit, that is,
EUR/USD equals 1.2812. In this instance, a single pip
equals the smallest change in the fourth decimal place, 

that is, 0.0001. 
Therefore, if the quote currency in any pair is USD, then one pip 
always equals 1⁄100 of a cent. One notable exception
is the USD/JPY pair where a pip equals $0.01 
(one U.S. Dollar equals approximately 107.19 Japanese Yen). 
Pips are sometimes called points.

3.6 Forex Lexicon : Quote Currency

The quote currency is the second currency in any currency pair.
This is frequently called the pip currency and any unrealized
profit or loss is expressed in this currency.

3.5 Forex Lexicon : Base Currency

The base currency is the first currency in any currency pair.
It shows how much the base currency is worth as measured
against the second currency. For example, if the USD/CHF
rate equals 1.6215, then one USD is worth CHF 1.6215.
In the FOREX markets, the U.S. Dollar is normally considered
the “base” currency for quotes, meaning that quotes are expressed
as a unit of $1 USD per the other currency quoted in the pair.
The primary exceptions to this rule are the
British Pound, the Euro, and the Australian Dollar.

3.4 Forex Lexicon : Exotic Currency

An exotic is a currency pair in which one currency is the USD
and the other is a currency from a smaller country such as
the Polish Zloty. There are approximately 25 exotics that
can be traded by the retail FOREX participant.

3.3 Forex Lexicon : Cross Currency

A cross currency is any pair in which neither currency 
is the U.S. Dollar. These pairs may exhibit erratic price
behavior since the trader has, in effect, initiated two USD trades.
For example, initiating a long (buy) EUR/GBP trade is equivalent
to buying a EUR/USD currency pair and selling a GBP/USD.
Cross currency pairs frequently carry a higher transaction cost.
The three most frequently traded cross rates are

3.2 Forex Lexicon : Major and Minor Currencies

The seven most frequently traded currencies
are called the major currencies. All other currencies are
referred to as minor currencies. The most frequently
traded minors are the New Zealand Dollar (NZD),
the South African Rand (ZAR), and the Singapore Dollar (SGD).
After that, the frequency is difficult to ascertain because of
perpetually changing trade agreements in the international arena.

3.1 The Forex Lexicon : Currency Pairs

Every FOREX trade involves the simultaneous buying of
one currency and the selling of another currency.
These two currencies are always referred to as the
currency pair in a trade.

The biggest mental hurdle facing newcomers to currencies,
especially traders familiar with other markets, is getting their
head around the idea that each currency trade consists of a
simultaneous purchase and sale.
In the stock market, for instance, if you buy 100 shares of Google,
 you own 100 shares and hope to see the price go up.
When you want to exit that position, you simply sell what
you bought earlier. Easy, right?
But in currencies, the purchase of one currency involves the
simultaneous sale of another currency.

This is the exchange in foreign exchange.
To put it another way, if you’re looking for the dollar to go higher,
 the question is “Higher against what?”

The answer is another currency. In relative terms, if the dollar
goes up against another currency, that other currency also
has gone down against the dollar. To think of it in stock-
market terms, when you buy a stock, you’re selling cash, and
when you sell a stock, you’re buying cash.

2. What Is a Spot Market?

A spot market is any market that deals in the current price of a
financial instrument.Settlement of FOREX spot transactions usually
occurs within two business days. There are also futures and forwards
in FOREX, but the overwhelming majority of traders use the spot market.
The FOREX market is essentially a cash or spot market in which over 90%
of the trades are liquidated within 48 hours. Currency trades held longer than
this are normally routed through an authorized commodity futures exchange
such as the International Monetary Market.

1.What Is FOREX?

Foreign exchange is the simultaneous buying of one currency and selling of
another. Currencies are traded through a broker or dealer and are executed in
currency pairs; for example, the Euro Dollar and the US Dollar (EUR/USD) or
the British Pound and the Japanese Yen (GBP/JPY).
 The FOReign EXchange Market (FOREX) is the largest financial market
 in the world, with a volume of over $2 trillion daily. This is more than three
times the total amount of the stocks and futures markets combined.
 Unlike other financial markets, the FOREX spot market has neither a
physical location nor a central exchange. It operates through an electronic net-
work of banks, corporations, and individuals trading one currency for another.
The lack of a physical exchange enables the FOREX market to operate on a 24-
hour basis, spanning from one time zone to another across the major financial

New blog/New hopes

 Another fx blogspot.
This is just a place for a diary of clearing the concepts.
So, let's start with a warning from Sun Tzu's "Art of War":

"War is a matter of vital importance to the state;
a matter of life and death, the road either to survival or to ruin.
 Hence, it is imperative that it be thoroughly studied.
 Therefore, to make assessment of the outcome of a war,
one must compare the various conditions of the antagonistic
sides in terms of the five constant factors:
1. moral influence
2. weather
3. terrain
4. commander
5. doctrine
These five constant factors should be familiar to every general.
He who masters them wins, he who does not is defeated."