How to Value Currency Pairs


Generally, in the FOREX market, currencies are traded in pairs. For example, Euro / US Dollar or US Dollar / Japanese Yen. Whenever you exchange currencies online, you are buying one currency and selling another. Currency pairs are abbreviated. The above pairs would be EUR / USD and USD / JPY. The currency on the left is called the base currency and the currency on the right is the cross currency.

The value of a currency pair is determined by the strength or weakness of the base currency against the cross currency. The value of the base currency is always 1. This means that when you see a quote of 1.4652 for EUR / USD, its value means that 1 euro will buy 1.4652 dollar. The next day you can see a EUR / USD quote of 1.4725. If you listen to the financial information, you will hear it say something along the lines of "the euro has gained strength against the dollar today" or "the dollar has fallen today against the dollar" # 39; euro. " In pocket English, it just means that it takes more dollars today to buy 1 euro than yesterday.

Let's say you have an online FOREX account and bought EUR / USD yesterday at the above price of 1.4652 and today you sold or closed your transaction at 1.4725. That would leave a profit of 73 pips. What the heck could you ask. Well, a pip has two definitions, but they both mean the same thing, at least as far as the dollar is concerned: the price point of interest and the entry point percentage. I have never been able to get a clear difference in definitions no matter who I asked the question to, and I don't really care anymore because, as I said, they mean the same thing for the dollar.

When trading currencies online, you will need to open an account with a forex broker. You can open a standard account or a mini account. In the standard account, a pip is worth around $ 10, and in the mini-account, it is worth around $ 1. Previously, the pip was the smallest unit of value on the FOREX market. Today however, many forex brokers are trading in tenths of a pip. They carried out the estimate with an additional decimal number to give better and more precise spreads. So the quote above could have read 1.47253, where the 3 is the tenth of a pip. Its value would therefore be $ 3 or $ 0.30 depending on the type of account you have.

You may have noticed that I said that the value of the pip is about 1 dollar. This is because each currency pair has its own pip value. True value is determined by mathematical formulas and the exchange rate of the currency pair. Some pip values ​​are fixed and others fluctuate slightly when one of the currencies increases or decreases in value against the other currency in the pair.

Currency transactions are carried out in fixed amounts called lots. A lot in a standard account is equal to $ 1,000, which controls $ 100,000. A lot of the mini account is equivalent to $ 100 and controls $ 10,000. Standard and mini accounts generally have a 1% margin which allows the FOREX 100 to 1 trader to benefit from their investments.

If you trade currencies online, the ultimate goal is to capture as many pips as possible, and not get bogged down in the details of the exact value of each currency pair. Unless you want to become an economist or something like that, the information presented here is more than enough to allow you to put as many pips into your account as possible.

Comments are closed.