When it comes to the foreign exchange market, the actual sizes of the trades that are going on can actually be quite confusing. Not only is there a bit of jargon you need to learn, but you’re also going to be working with figures that you could be unfamiliar with.
To start familiarizing yourself with the sizes of trades within the currency market, the first kind of figure you need to be aware of is the exchange rate. Where you may be used to exchange rates that are just two decimal places long, i.e. 1.42, you will find that when it comes to currency exchange, they’re 4 decimal places long, i.e. 1.4267.
The littlest decimal place, i.e. $0.0001, is known as a pip or point. Both are actually short for ‘Price Interest Points’.
So if you have heard people talking about how a currency increased by ’10 pips’, that just suggests that it increased by $0.0010. Naturally, in the currency market lots of the trades that go on are fairly large in size, and so for an investment of $100,000, a single pip’s worth of change is worth $10. Thus an increase of ten pips would be a profit of $100!
Mind you, this pip worth that we’ve been discussing does vary from currency to currency. In the examples above, we’ve been talking about how it pertains to the US Dollar, except for other currencies it may differ dependent on how the currency is traded.
Frankly, you are not going to be ready to remember the pip price for every world currency ( unless you are enormously experienced, or have an amazing memory ). In all truth, you really do not need to though.
Knowing the lingo and appreciating forex trade sizes is helpful, simply because it will allow you to wrap your head around the trades that are going on, and you are undertaking for yourself.
For the common currencies, you will even find that as you become familiar with the foreign exchange market, you unavoidably end up recalling their pip values.
On the other hand, for other currencies you could just look them up on an as-needed basis.
What you need to understand most though is that the pip cost of various currencies will play a part in the ‘lots’ that you can buy. As an example, a currency pair with dollars as the second currency ( i.e. The one being traded into ) always has a pip value of $10 per lot, or $1 per mini lot.
essentially, this implies that you’d be trading in lots of $100,000 or $10,000.
Identifying rules such as that will help you to ascertain what you can invest and where you can invest it. After that, it’s all just a matter of picking what you’re feeling will be worthwhile, based totally on the options that you have available.
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One area of currency exchange that’s barely debated, despite how important it is, is the capital that any investor requires if they want to enter the market. Without capital, you have nada to invest and thus it is inconceivable to foray into the currency market.
Even when you do have capital though, there’s more concerned with managing capital than most people ever think about. For one thing, regardless of how much capital you have, you must know the way to make that capital work for you else it’ll just get wasted.
End of the day, this comes down to an issue of data : How much do you actually know about the foreign exchange market? Do you know the different sorts of trades that can be accomplished? Do you know ways to place limits and stop orders? Did you know what types of trades are most profitable?
And most significantly : Do you know how to cut your losses when you should?
All of these questions must be answered affirmatively before you can actually dig into the currency market with your capital. Without the obligatory knowledge of the fine details of the market, you’re going to be essentially going into it blind, and that’s a sure recipe for disaster.
Mind you, even once you have sufficient data to go into the currency market, there’s more you need to think about. To start, all the knowledge in the world can’t save you from mysterious fluctuations that sometimes take place.
By nature, the forex market is partly predicted. But at the same time, it is also partly unpredictable and irrespective of how savvy a speculator you are finally you are going to come up against a situation that you could not predict in any way.
When that occurs, knowing that you should cut your losses is vital, but as importantly, handling your capital from the off so a single freak situation does not cripple your investments is just as important.
Imagine if you were to invest all your capital into a single trade that went bad. Even if you managed to sell before things truly hit the very bottom, you’d find that you have lost a large share of your capital.
Whereas if you would managed your capital effectively and only invested a small portion of it, you’d have lost a load less.
Naturally the common discussion against this is that by investing less you’re reducing your potential to earn profits. Actually, this is true, but at the same time putting all your eggs into one basket, whatever how attractive-sounding it could be, is never a great idea.
Remember : Your capital is your lifeline, and you should strive to manage it as effectively as possible . Split it into tiny groups and invest carefully. Once you get into the swing of it, you can start investing bigger groups.
By sensibly handling your capital in the forex market, you stand to gain a lot, with significantly reduced risk.
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Are there any good forex books by authors that actually make money on trading?