Forex Terms - Market Mechanism
|CURRENCY PAIRS||Price||1 pip||1 pip move per 100k (lot)|
|EURUSD||1.072||.000||EUR 100,000 X .0001 = USD 10|
|GBPUSD||1.211||.000||GBP 100,000 X .0001 = USD 10|
|AUDUSD||0.694||.000||AUD 100,000 X .0001 = USD 10|
|USDCHF||0.922||.000||USD 100,000 X .0001 = CHF 10 / Spot = approx. USD 8.5|
|USDJPY||130.9||.0||USD 100,000 X .01 = JPY 1,000 / Spot = approx. USD 9.7|
|USDCAD||1.343||.000||USD 100,000 X .0001 = CAD 10 / Spot = approx. USD 8.00|
|EURCHF||0.988||.000||EUR 100,000 X .0001 = CHF 10 / Spot = approx. USD 8.5|
|EURJPY||140.2||.0||EUR 100,000 X .01 = JPY 1,000 / Spot = approx. USD 9.7|
|GBPCHF||1.117||.000||GBP 100,000 X .0001 = CHF 10 / Spot = approx. USD 8.5|
|GBPJPY||158.5||.0||GBP 100,000 X .01 = JPY 1,000 / Spot = approx. USD 9.7|
The US Dollar is the centerpiece of the Forex market and is normally considered the ‘base’ currency FOR QUOTES. In the ‘Majors’, this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 130.91 means that one US dollar is equal to 130.91 Japanese Yen.
When the US dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened.
The four exceptions to this rule are the British Pound (GBP), the Australian dollar (AUD), the New Zealand dollar (NZD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.2114, meaning that one British pound equals 1.2114 US dollars.
Prices are quoted in PIPS. PIP stands for “percentage in point” and is the fourth decimal point.
In EUR/USD, a 2 pip spread is quoted as 1.0724/1.0726.
In US/JPY, a 3 pip spread is quoted as 130.91/130.94
To illustrate a typical FX trade, consider the following examples:
1 - The current Bid/Ask price for EUR/USD is 1.0752/54.
Suppose you decide the Euro is undervalued against the US Dollar. To execute this strategy, you would Buy Euros (simultaneously selling Dollars), and then wait for the exchange rate to rise.
You bought at 1.0754, the Then the Euro went up to the 1.0790 level.
To realize your profits: 1.0790 – 1.0754 = 36 pips x $10 = US $360.
2 – With a $10,000 balance in your account, you decide that the US Dollar (USD) is undervalued against the Swiss Franc (CHF).
To execute this strategy, you must Buy Dollars (simultaneously Selling Francs), and then wait for the exchange rate to rise.
The current price for USD/CHF is 0.9185/0.9187 (meaning you can Buy $1 US at 0.9187).
Your available leverage is 100:1.
As expected, USDCHF rises 50 pips → 0.9237.
0.9237 – 0.9187 = 50 CHF.
To calculate your P&L in terms of US Dollars, simply divide 50 by the current USD/CHF rate of 0.9187, your profit on this trade is $540 ⁓.