How to calculate Forex trading profit and loss| Forex calculation formulas| Forex Education

 

Now you have Knowledge about, how to calculate pip value and leverage, let's look at how you calculate your profit or loss.

Let's buy U.S. dollars and Sell Swiss francs.

1. The rate you are quoted is 1.4525 / 1.4530. Because you are buying U.S. dollars you will be working on the "ask" price of 1.4530, or the rate at which traders are prepared to sell.

2. So you buy 1 standard lot (100,000 units) at 1.4530.

3. A few hours later, the price moves to 1.4550 and you decide to close your trade.

4. The new quote for USD/CHF is 1.4550 / 1.4555. Since you're closing your trade and you initially bought to enter the trade, you now sell in order to close the trade so you must take the "bid" price of 1.4550. The price traders are prepared to buy at.

5. The difference between 1.4530 and 1.4550 is .0020 or 20 pips.

6. Using our formula from before, we now have (.0001/1.4550) x 100,000 = $6.87 per pip x 20 pips = $137.40

Remember, when you enter or exit a trade, you are subject to the spread in the bid/offer quote. When you buy a currency, you will use the offer or ask price and when you sell, you will use the bid price.

Forex Profit Calculator

What is volatility in forex trading-Definition of "Volatility" in Forex Trading|Forex Education

 

Definition of "Volatility" in Forex Trading

Volatility Definition in Forex Trading is, how much a price fluctuates over a period of time. A market with a high and Unstable price range is said to have high volatility.

What is volatility in forex trading?

Volatility is the proportion of how definitely a market's costs change. Fluid business sectors, for example, forex will in general move in more modest additions on the grounds that their high liquidity brings about lower instability. More dealers exchanging simultaneously normally brings about the value making little developments here and there. 

We can Say Volatility in Forex Trading Market is 2 eruptive, unstable, unsettled.

Is Volatility good for forex?

As with short-term trading approaches, forex volatility is also essential when it comes to making money from the markets. The general thought behind long-term trading is that price fluctuations will result in a profit over an extended period of time. This strategy requires patience and Large Scale and Vast trading knowledge.

What causes forex volatility?

Volatility is produced in a currency due to a range of possible factors including inflation levels, interest rates, tourism, geopolitical stability, import and export levels, and monetary policy, among other factors.

Forex Volatility Calculator:

Next Read:

How To Read A Forex Currency Quote-How To Read Currency Pairs

How to Make Money in Forex Trading-Earn Money Online

 

How You Make Money in Forex

People would buy a currency pair at a lower price and sell it at a higher price, and their income is the difference between the Buy and the Sell price. Broker gets a tiny commission from your trades called Spread.

Procedure to Make Money in Forex Trading

In the forex market, you buy or sell currencies.

Placing a trade in the foreign exchange market is simple: the mechanics of a trade are very similar to those found in other markets (like the stock market), so if you have any experience in trading, you should be able to pick it up pretty quickly.

The object of forex trading is to exchange one currency for another in the expectation that the price will change, so that the currency you bought will increase in value compared to the one you sold.

Example:

Trader's Action	EUR	USD
You purchase 10,000 euros at the EUR/USD exchange rate of1.1800	+10,000	-11,800*
Two weeks later, you exchange your 10,000 euros back into U.S. dollar at the exchange rate of 1.2500	-10,000	+12,500**
You earn a profit of $700	0	+700

*EUR 10,000 x 1.18 = US $11,800

** EUR 10,000 x 1.25 = US $12,500

An exchange rate is simply the ratio of one currency valued against another currency. For example, the USD/CHF exchange rate indicates how many U.S. dollars can purchase one Swiss franc, or how many Swiss francs you need to buy one U.S. dollar.

Next Read:

What Is Volatility In Forex Trading-Definition Of "Volatility" In Forex Trading

What are the Best Days of the Week to Trade Forex-Weekely Average pip range for the major pairs |Learn Forex

 

Best Days of the Week to Trade Forex

All in all, Tuesday, Wednesday and Thursday are the best days for Forex trading due to higher volatility. During the middle of the week, the currency market sees the most trading action. As for the rest of the week, Mondays are static, and Fridays can be unpredictable.

Below is a chart of average pip range for the major pairs for each day of the week:

As you can see from the chart above, it would probably be best to trade during the middle of the week, since this is when the most action happens.

Fridays are usually busy until 12:00 pm EST and then the market pretty much drops dead until it closes at 5:00 pm EST. This means we only work half-days on Fridays.

So based on all these, we've learned when the busiest times of the market are. The busiest times are the best times to trade because they give you a higher chance of success.

Best Times to Trade:

When two sessions are overlapping of course! These are also the times where major news events come out to potentially spark some volatility and directional movements. Make sure you bookmark the Market Hours sheet to take note of the Opening and Closing times.

The European session tends to be the busiest out of the three.

The middle of the week typically shows the most movement, as the pip range widens for most of the major currency pairs.

Worst Times to Trade:

Weekends:

The worst time to trade Forex, the first comes late Sunday and half of Monday, as mentioned before. At this period of time, everyone is still slow, sleepy and or re-assessing/forecasting the market direction ahead of the trading week. Nobody trades on weekend, and you should not as well.

Major news releases:

The other worst period for Forex trading includes major news releases, whether it is financial reports, economic data, or political updates. Such major news can have an unexpected and unpredictable effect on Forex market. Such releases can be easily tracked in Forex economic calendar. In case you are not following this news, you are risking your funds.

Fridays:

Most of the traders close their Forex positions on Friday. This is done in order to avoid the opening gaps of Monday. The traders prefer not to hold any open positions over the weekend, as the liquidity and market are on the slowdown.

What are the best times to trade forex?

The forex market runs on the normal business hours of four different parts of the world and their respective time zones. The U.S./London markets overlap (8 a.m. to noon EST) has the heaviest volume of trading and is best for trading opportunities.

Which month is best for forex trading?

This makes autumn months the best time of the year to trade Forex. By the second half of December, trading activity slows down - much like in August. The few weeks before and after Christmas are the slowest. It's not until mid-January that the markets start to pick up.

Next Read:

Session Overlap.

What is the Reuters system?-How does Reuters work?|Forex Education

 Reuters trading platform-THOMSON REUTERS SPOT MATCHING.

What is the Reuters system?

Reuters Market Data System (RMDS) is an open market data platform provided by Thomson Reuters. RMDS is used to transport, integrate and manage financial data from stock exchanges and other data sources to end users (such as a bank or enterprise) using multicast or broadcast technology.

Who is Reuters owned by?

Thomson Reuters

Reuters is an international news organization owned by Thomson Reuters. It employs around 2,500 journalists and 600 photojournalists in about 200 locations worldwide. Reuters is one of the largest news agencies in the world. The agency was established in London in 1851 by the German-born Paul Reuter

Is Thomson Reuters the same as Reuters?

Reuters is part of the Thomson Reuters Corporation. It is both a global news agency and a major provider of financial markets trading and analytical software.

.

THOMSON REUTERS SPOT MATCHING

Find liquidity easily. Thomson Reuters Spot Matching is the leading anonymous electronic trade matching system for the inter-bank community. With over 1,100 subscriber banks, it offers unbiased access to real-time executable process on 54 spot currency pairs. Spot Matching offers FX professional the most comprehensive range of transaction real-time prices in the market.

How does Reuters work?

It is a wholesaler of news – in the form of text stories, photographs and video footage – to the media industry. Clients pay a subscription which entitles them to use Reuters news stories, pictures or video footage in their papers, magazines, websites or news bulletins.

Next Read:What Are Forex Market Hours|Forex Trading Sessions

Next Read: 

Tokyo/Asian Session, 

London Session, 

New York Session.

Session Overlap.

Electronic Broking Services (EBS)- Electronic trading platform|in Foreign Exchange Markets

 What is electronic Broking system (EBS) in     Forex Market-Trading?

Electronic Broking Services is a wholesale electronic trading platform used to trade foreign exchange with market-making banks. It was originally created as a partnership by a number of the world's largest banks and is now part of CME Group. Wikipedia

Electronic Broking Services(EBS) is an organization created by some of the world’s biggest banks and financial institutions, whose goals are to provide an efficient, cost friendly, and liquid inter-bank Forex trading platform. It was formed in 1990 to rival market leader Reuters and its trading system.

It is estimated that about $200 billion worth of spot Forex transactions take place on this platform, which takes up the majority of all spot transactions.

Next Read: What Is The Reuters System?-How Does Reuters Work?

Next Read: What Are Forex Market Hours|Forex Trading Sessions

What is Forex (FX) Ladder-Forex Market Structure-Forex Market Hierarchy

            What is Forex (FX) Ladder

Even though the Forex market is decentralized, it isn't pure and utter chaos! The participants in the FX market can be organized into a ladder. To better understand what we mean, here is a neat illustration:

What is market structure/Market Hierarchy  in Forex?

Market structure is simply support and resistance on your charts, swing highs, and lows. These are levels on your chart attracts the most attention.And how you can combine candlestick patterns with market structure is that you are basically looking to enter your trades after strong price rejection.

 

Forex (FX) Ladder|Forex Market Structure

The main participants are the large international banks, financial centers around the world, brokers and speculators. The forex market structure hierarchy is divided basing on the classification of participants, their motivation, regulations and the level of liquidity they hold at each level.

At the very top of the Forex market ladder is the interbank market. Composed of the largest banks of the world and some smaller banks, the participants of this market trade directly with each other or electronically through the Electronic Brokering Services (EBS) or the Reuters Dealing 3000-Spot Matching.

The competition between the two companies - the EBS and the Reuters Dealing 3000-Spot Matching - is similar to Coke and Pepsi.

They are in constant battle for clients and continually try to one-up each other for market share. While both companies offer most currency pairs, some currency pairs are more liquid on one than the other.

For the EBS plaform, EUR/USD, USD/JPY, EUR/JPY, EUR/CHF, and USD/CHF are more liquid. 

Meanwhile, for the Reuters platform, GBP/USD, EUR/GBP, USD/CAD, AUD/USD, and NZD/USD are more liquid.

All the banks that are part of the inter-bank market can see the rates that each other is offering, but this doesn't necessarily mean that anyone can make deals at those prices.

Like in real life, the rates will be largely dependent on the established CREDIT relationship between the trading parties.

 It's like asking for a loan at your local bank. The better your credit standing and reputation with them, the better the interest rates and the larger loan you can avail.

Next on the ladder are the hedge funds, corporations, retail market makers, and retail ECNs. 

Since these institutions do not have tight credit relationships with the participants of the inter-bank market, they have to do their transactions via commercial banks. This means that their rates are slightly higher and more expensive than those who are part of the inter-bank market.

At the very bottom of the ladder are the retail traders. It used to be very hard for us little people to engage in the Forex market but, thanks to the advent of the internet, electronic trading, and retail brokers, the difficult barriers to entry in Forex trading have all been taken down. This gave us the chance to play with those high up the ladder and poke them with a very long and cheap stick.

Now that you know the Forex market structure.

Read:What is Electronic Broking Services?

What Is The Reuters System?-How Does Reuters Work?

What Are The Different Ways Of Forex Trading|Forex education for beginners

                Different Ways to Trade Forex

Here are the Different Ways Of Forex Trading

Because Forex is so Valuable,traders came up with a number of different ways to invest or speculate in currencies. Among these,the most popular ones are Forex Spot, Futures,Options, and exchange-traded funds (or ETFs).

Spot Market

In the spot market, currencies are traded immediately or "on the spot," using the current market price. What's valuable about this market is its simplicity, liquidity, tight spreads, and round-the-clock operations. It's very easy to participate in this market since accounts can be opened with as little as a $30.

The New York Stock Exchange (NYSE) is an example of an exchange where traders buy and sell stocks for immediate delivery. This is a spot market.

There two main types of spot markets – over-the-counter (OTC) and organized market exchange.

Futures

Futures are contracts to buy or sell a certain asset at a specified price on a future date (That's why they're called futures!). Forex futures were created by the Chicago Mercantile Exchange (CME) way back in 1972.Since futures contracts are standardized and traded through a centralized exchange,the market is very transparent and well-regulated. This means that price and transaction information are readily available.

Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. The buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.

Differences between forward and futures market

Forward markets are used to contract for the physical delivery of a commodity. By contrast, futures markets are 'paper' markets used for hedging price risks or for speculation rather than for negotiating the actual delivery of goods.

Options

An "option" is a financial instrument that gives the buyer the right or the option, but not the obligation, to buy or sell an asset at a specified price on the option's expiration date. If a trader "sold" an option, then he or she would be obliged to buy or sell an asset at a specific price at the expiration date.

Just like futures, options are also traded on an exchange, such as the Chicago Board Options Exchange, the International Securities Exchange, or the Philadelphia Stock Exchange. However, the disadvantage in trading Forex options is that market hours are limited for certain options and the liquidity is not nearly as great as the futures or spot market.

What is option with example?

Now that you know the basics of options, here is an example of how they work. The strike price of $70 means that the stock price must rise above $70 before the call option is worth anything; furthermore, because the contract is $3.15 per share, the break-even price would be $73.15.

The two most common types of options are calls and puts:

Call options. Calls give the buyer the right, but not the obligation, to buy the underlying asset.

Put options. Puts give the buyer the right, but not the obligation, to sell the underlying asset at the strike price specified in the contract.

Exchange-traded Funds(ETFs)

Exchange-traded funds or ETFs are the youngest members of the Forex world.

An ETF could contain a set of stocks combined with some currencies, allowing the trader to diversify with different assets. These are created by financial institutions and can be traded like stocks through an exchange. Like Forex options, the limitation in trading ETFs is that the market isn't open 24 hours. Also, since ETFs contain stocks, these are subject to trading commissions and other transaction costs. They combine features and potential benefits of stocks, mutual funds, or bonds. Like individual stocks, ETF shares are traded throughout the day at prices that change based on supply and demand.

Next Read: 

 Forex (FX) Ladder-Forex Market Structure-Forex Market Hierarchy

What is Forex Market Size and Liquidity|Forex Education Step By Step

 

Forex Market Liquidity and Volatility and Size

What Is a Liquid Market?

A liquid market a one with many available buyers and sellers and comparatively low transaction costs. The details of what makes a market liquid may vary depending on the asset being exchanged. In a liquid market, it is easy to execute a trade quickly and at a desirable price because there are numerous buyers and sellers and the product being exchanged is standardized and in high demand. In a liquid market despite daily changes in supply and demand the spread between what the buyer wants to pay and what sellers will offer remains relatively small.

What Is illiquid and Thin Market?

Illiquid refers to the state of a stock, bond, or other assets that cannot easily and readily be sold or exchanged for cash without a substantial loss in value. Illiquid assets may be hard to sell quickly because there is low trading activity or interest in the issue, indicated by a lack of ready and willing investors or speculators to purchase or sell the asset. As a result, illiquid assets tend to have lower trading volume, wider bid-ask spreads, and greater price volatility.

Market Size and Liquidity

Unlike other financial markets like the New York Stock

Exchange, the Forex market has neither a physical location
nor a central exchange.

The Forex market is considered an Over-the-Counter (OTC), or "Inter bank", market due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.

This means that the spot Forex market is spread all over the globe with no central location. They can take place anywhere.

The Forex OTC market is by far the biggest and most popular financial market in the world, traded globally by a large number of individuals and organizations.

In the OTC market, participants determine who they want to trade with depending on trading conditions, attractiveness of prices, and reputation of the trading counterpart.

The dollar is the most traded currency, taking up 84.9% of all transactions. The euro's share is second at 39.1%, while that of the yen is third at 19.0%. As you can see, most of the major currencies are hogging the top spots on this list!

Here is Chart:

Currency distribution in Forex(FX) market

The Dollar is King

 If the USD is one half of every major currency pair, and the

 majors comprise 75% of all trades, then it's a must to pay

 attention to the U.S. dollar. The USD is king!

 In fact, according to the International Monetary Fund (IMF),

 the U.S. dollar comprises roughly 62% of the world's official 

 foreign exchange reserves! Because almost every investor, 

 business, and central bank own it, they pay attention to the 

 U.S. dollar.

Reasons why the U.S. dollar plays a central role in the Forex market:

1-The United States economy is the LARGEST economy in the world.

2-The U.S. dollar is the reserve currency of the world
.
3-The United States has the largest and most liquid financial

markets in the world.

4-The United States has a super stable political system.

5-The United States is the world's sole military superpower.

The U.S. dollar is the medium of exchange for many cross-

border transactions. For example, oil is priced in U.S. dollars.

 So if India wants to buy oil from Saudi Arabia, it can only be

 bought with U.S. dollar. If India doesn't have any dollars, it

 has to sell its Rupee first and buy U.S. dollars.

What Is Volatility In Forex Trading-Definition Of "Volatility"

 In Forex Trading

Currency Composition of World Forex (FX)
 Reserves

What are Major Currencies and Currency Pairs in Forex Trading Market|Forex Trading Education

 What are Major Currencies and Currency Pairs in Forex Trading Market|

Major Currencies

Symbol	Country	Currency	Nickname
USD	United States	Dollar	Buck
EUR	Euro zone members	Euro	Fiber
JPY	Japan	Yen	Yen
GBP	Great Britain	Pound	Cable
CHF	Switzerland	Franc	Swiss
CAD	Canada	Dollar	Lonnie
AUD	Australia	Dollar	Aussie
NZD	New Zealand	Dollar	Kiwi

Currency symbols always have three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country's currency.

Take NZD for instance. NZ stands for New Zealand, while D stands for dollar. Easy enough, right?

The currencies included in the chart above are called the "majors" because they are the most widely traded ones.

We'd also like to let you know that "buck" isn't the only nickname for USD.

There's also: greenbacks, bones, benjis, Benjamin’s, cheddar, paper, loot, scrilla, cheese, bread, moolah, dead presidents, and cash money.

Did you also know that in Peru, a nickname for the U.S. dollar is Coco, which is a pet name for Jorge (George in Spanish), a reference to the portrait of George Washington on the $1 note?

Currencies Are Traded in Pairs

Forex trading is the simultaneous buying of one currency and selling another. Currencies are traded through a broker or dealer, and are traded in pairs; for example the euro and the U.S. dollar (EUR/USD) or the British pound and the Japanese yen (GBP/JPY).

When you trade in the Forex market, you buy or sell in currency pairs.

Imagine each pair constantly in a "tug of war" with each currency on its own side of the rope. Exchange rates fluctuate based on which currency is stronger at the moment.

Major Currency Pairs

The currency pairs listed below are considered the "majors". These pairs all contain the U.S. dollar (USD) on one side and are the most frequently traded. The majors are the most liquid and widely traded currency pairs in the world.

Pair	Countries	FX Geek Speak
EUR/USD	Euro zone / United States	"euro dollar"
USD/JPY	United States / Japan	"dollar yen"
GBP/USD	United Kingdom / United States	"pound dollar"
USD/CHF	United States/ Switzerland	"dollar swissy"
USD/CAD	United States / Canada	"dollar loonie"
AUD/USD	Australia / United States	"aussie dollar"
NZD/USD	New Zealand / United States	"kiwi dollar"

 

Major Cross-Currency Pairs or Minor Currency Pairs

Currency pairs that don't contain the U.S. dollar (USD) are known as cross-currency pairs or simply as the "crosses." Major crosses are also known as "minors." The most actively traded crosses are derived from the three major non-USD currencies: EUR, JPY, and GBP.

Euro Crosses

Pair	Countries	FX Geek Speak
EUR/CHF	Euro zone / Switzerland	"euro swissy"
EUR/GBP	Euro zone / United Kingdom	"euro pound"
EUR/CAD	Euro zone / Canada	"euro loonie"
EUR/AUD	Euro zone / Australia	"euro aussie"
EUR/NZD	Euro zone / New Zealand	"euro kiwi"

 

 Yen Crosses

Pair	Countries	FX Geek Speak
EUR/JPY	Euro zone / Japan	"euro yen" or "yuppy"
GBP/JPY	United Kingdom / Japan	"pound yen" or "guppy"
CHF/JPY	Switzerland / Japan	"swissy yen"
CAD/JPY	Canada / Japan	"loonie yen"
AUD/JPY	Australia / Japan	"aussie yen"
NZD/JPY	New Zealand / Japan	"kiwi yen"

Pound Crosses

Pair	Countries	FX Geek Speak
GBP/CHF	United Kingdom / Switzerland	"pound swissy"
GBP/AUD	United Kingdom / Australia	"pound aussie"
GBP/CAD	United Kingdom / Canada	"pound loonie"
GBP/NZD	United Kingdom / New Zealand	"pound kiwi"

Other Crosses

Pair	Countries	FX Geek Speak
AUD/CHF	Australia / Switzerland	"aussie swissy"
AUD/CAD	Australia / Canada	"aussie loonie"
AUD/NZD	Australia / New Zealand	"aussie kiwi"
CAD/CHF	Canada / Switzerland	"loonie swissy"
NZD/CHF	New Zealand / Switzerland	"kiwi swissy"
NZD/CAD	New Zealand / Canada	"kiwi loonie"

You Can Read Introduction To Forex Trading:

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