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
Metatrader).
These calculations provide mission-critical information about
the relationship between several key factors:
pip values, dollar values, leverage, and margin.
Monday, November 2, 2009
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.
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
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.
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.”
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.
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
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
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).
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).
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).
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