Play the Game of Forex! (Part 2)

Reading Forex Quotes

Foreign exchange rates quoted in the currency pair and almost always with four decimal places. For example, if the quote currency is the EUR / USD = 1.4321, the left hand of the eye called the "base currency" and the currency right hand is called "counter currency." Base currency always has a value of 1. In the example above, the euro is the base currency while the dollar the United States is the counter currency. Here's how to read the quote currency, one euro equals 1.4321 dollars the United States, at the time.

The foreign exchange quote stating two things. First, if a broker wants to buy the base currency union, they have to pay 1.4321 US dollar to buy 1 euro union. However, if a broker wants to sell the base currency they will receive 1.4321 US dollars when sold 1 euro. It is also important to understand that the exchange rate fluctuate with changing market conditions, each time stronger or weaker euro against the United States dollar.

Factors Yen

Not all citations made in foreign currency equivalent, especially when associated with the Japanese yen. Whenever the Japanese yen is in a position counter currency, currency quotations appear with two decimals instead of four. Example:

USD / JPY = 80.77

The quote above states that the United States 1 dollar equals 80.77 Japanese yen at the time.

If the quote USD / JPY rose from 80.77 into 80.97, the United States dollar strengthened against the Japanese yen, and vice versa.

Pip

Pip stands for price interest point. It is the unit of measurement to express the change in value between the two currencies. For example, the price of AUD / USD is 1.0123, if the price rises to 1.0124 or down to 1.0122, this is a movement of 0.0001, or one pip. When the price of USD / JPY today is 81.12, and if the price rose to 81.13 or fall to 81.11, then this is a movement of 0.01 or 1 pip.

One pip is the smallest value changes on foreign exchange quote, good value quoted with two decimal or four decimal places. Here are some examples:

• If the quotation EUR / USD moved up from 1.3123 becomes 1.3146, this is a movement of 23 pips. If the quote EUR / USD move down from 1.3123 into 1.3101, this is a movement of 22 pips.
• If the quote USD / CHF moving up from 0.9100 becomes 0.9154, this is a movement of 54 pips. If the quote USD / CHF move down from 0.9100 into 0.9000 is the movement of 100 pips.
• If the quote USD / JPY moved up from 80.66 into 80.88, this is a movement of 22 pips. If the quote USD / JPY moved down from 80.66 into 80.00, this is a movement of 66 pips.

Pipette

Many brokers quote currency is currently expanding beyond the standard four and two decimals, and three to five decimal places. For example, a broker can quote USD / CAD as 1.00888. If quotes rose to 1.00889 or dropped to 1.00887, this movement is called 1 pipette.

Similarly, if the USD / JPY is quoted as 81.222, when this currency pair rose to 81 223 or drop to 81.221, this movement is called 1 pipette.

How do I calculate the value of one pip?

Different currencies have different values. Therefore, the value of a pip is different for each currency.

The first thing to consider when calculating the value of a pip is found that for the majority of the foreign exchange quotations, especially the seven major currencies, the US dollar is the base currency or counter currency.

At the quotation USD / CHF, the US dollar is the base currency. At the quotation AUD / USD dollar is the counter currency.

Let's calculate the pip value for each sample, starting with the US dollar as the base currency (see example below)

The first example:

Suppose the price of USD / CHF at the moment is 0.9235. Thus the smallest movement of a pip is 0.0001. The formula to calculate pip value is:

Pip value = Motion smallest decimal / current rate

= 0.0001 / 0.9235

= 0.000108

A value of 1 pip while the USD / CHF is 0.9235 USD 0.000108.

To determine the value of a pip for Japanese yen pairs, let's look at another example.

When the price of USD / JPY is currently the smallest movement 81.55 for a pip is 0:01.

The formula to calculate pip value is:

The value of the smallest decimal pip = Movement / the current exchange rate

= 0:01 / 81.55

= 0.000123

A value of 1 pip when USD / JPY 81.55 is USD 0.000123.

Second example:

Let's see how to determine the value of a pip when the US dollar is the counter currency.

If the AUD / USD is now 1.0237, then:

The value of the smallest decimal pip:

= Movement / the current exchange rate

= 0.0001 / 1.0237

= 0.00009768

A value of 1 pip while AUD / USD 1.0237 is AUD 0.00009768. Note that in this case, the value of 1 pip 1 quoted in Australian dollars. To determine the value of 1 pip in US dollars, multiply the current pip value with the current exchange rate.

Pip value (in USD) 

= pip value (in base currency) x the current exchange rate

= 0.00009768 x 1.0237

= 0.0001

Thus the value of 1 pip when AUD / USD 1.0237 to USD 0.0001.

While the process may seem complicated, the good news that every broker with whom you trade will automatically calculate this value.

Okay, I will continue to the next post, about lot size and leverage.