What are Pips ?

To understand pips on the forex market you must understand how the market works. If you are new to forex trading there are many worthwhile, free offers and software online to help you learn and practise before risking your money.

Forex is an abbreviation of foreign exchange, the buying and selling of one foreign currency for another. As one currency strengthens so another weakens and knowing when to buy and sell is how money is made on the Forex markets. The Forex market is similar to the buying and selling of stocks but in many ways it is much more difficult. On the stock market you may spot a company that has potential, buy shares and hopefully make a profit, but on the money market there may be long term trends where a currency strengthens and weakens, but much of the trading is based upon daily fluctuations that change by the minute.

A pip is the smallest unit of price that is traded for a currency. Most currencies are traded to four decimal points, so that a pip is 0.0001 or 1/100 of a cent. This may seem a minuscule amount until you realise that on a standard trade of $100,000 that is $10. The exception to the four decimal points is the Japanese yen which is normally traded to two decimal points.

Obviously if you are buying a currency you must also be selling another and therefore prices are always quoted in pairs, the USD/EUR being the most active. The more active a pair the narrower the difference between the bid/ask price is likely to be, with a possible spread of just two pips for the most actively traded.
Unlike the stock market there are no broker fees to pay, but as each trade involves both selling one currency and buying another, the difference in the spread is the cost of the transaction and must be taken into account when calculating profit. Therefore, as a buyer, the pip spread is very important to you. When you buy you have to accept an immediate loss. The value of the currency you have bought must rise by the extent of the pip spread before you break even and the value rise again to make a profit. The lower the spread the easier it is to make a profit.
Active markets tend to have a lower pip spread, for example 2-3 pips. Currencies that are bought and sold less frequently may have a far higher spread. However, before you go to a broker offering a very narrow spread, do check that they are reputable. You should also remember that pip spreads are not guaranteed, they can change if the market fluctuates widely. It is wise to check a broker's spread policy before trading.

Avoiding/lowering risk when trading Forex

Trade like a technical analyst. Understanding the fundamentals behind an investment also requires understanding the technical analysis method. When your fundamental and technical signals point to the same direction, you have a good chance to have a successful trade, especially with good money management skills. Use simple support and resistance technical analysis, Fibonacci Retracement and reversal days. Be disciplined. Create a position and understand your reasons for having that position, and establish stop loss and profit taking levels. Discipline includes hitting your stops and not following the temptation to stay with a losing position that has gone through your stop/loss level. When you buy, buy high. When you sell, sell higher. Similarly, when you sell, sell low. When you buy, buy lower. Rule of thumb: In a bull market, be long or neutral - in a bear market, be short or neutral. If you forget this rule and trade against the trend, you will usually cause yourself to suffer psychological worries, and frequently, losses. And never add to a losing position.

Investing and Trading

Investing and Trading are not the same thing. The returns you seek, the length of time it takes to achieve those returns, the amount of risk one is prepared to take, and the commitment one can make to monitor the investments dictate the strategy of whether to invest or trade.



Investing

Investing is holding an asset for a longer term, expecting it to increase in value. The most common example is investing in equity mutual funds through a retirement plan. Many of these funds are held for years and are expected to show a substantial appreciation over the long term.



You can also invest in individual stocks and hold them for 6 to 18 months or longer, sometimes much longer. This is referred to as the "buy and hold" strategy.

Real estate would be another example of investing, unless the property is purchased for quick flipping.



Jewelry, art, stamps, and collectibles are still other examples of investing where they are kept for a long time in the hope their value appreciates.



Trading

Trading is also investing but the time frame for a return on that investment is a much shorter period, usually a matter of a few days or weeks.



The most obvious example would be day trading where a trader is in and out of a market the same day.



Still other trading takes place over a period from a few days to a few weeks.



Most trading takes place with individual stocks and commodities, with commodity markets being the most predominant vehicle.

Forex Platforms

A trading platform is a piece of software that acts as a conduit for information between a trader and a broker. A trading platform provides information such as quotes and charts, and includes an interface for entering orders to be executed by the broker. Trading platform software can be locally based, meaning it is installed on the trader's computer and can be used with Windows, Mac and Linux systems - different brokers offer different options in this respect. Alternatively, some brokers offer software that is web based. These platforms often run using Java, a dynamic web language. The advantage of web-based trading platforms is that they can be used by almost any computer with internet access. Trading platforms are often available free-of-charge, but some brokers allow traders to purchase platforms that have a higher functionality for a fee. Other brokers provide platforms with different levels of functionality for traders who are more active.

Reading Quotes

When a currency is quoted, it is done in relation to another currency, so that the value of one is reflected through the value of another. Therefore, if you are trying to determine the exchange rate between the U.S. dollar (USD) and the Japanese yen (JPY), the forex quote would look like this:

USD/JPY = 119.50

This is referred to as a currency pair. The currency to the left of the slash is the base currency, while the currency on the right is called the quote or counter currency. The base currency (in this case, the U.S. dollar) is always equal to one unit (in this case, US$1), and the quoted currency (in this case, the Japanese yen) is what that one base unit is equivalent to in the other currency. The quote means that US$1 = 119.50 Japanese yen. In other words, US$1 can buy 119.50 Japanese yen. The forex quote includes the currency abbreviations for the currencies in question.

Spots Market and Futures Market

Spots Markets
More specifically, the spot market is where currencies are bought and sold according to the current price. That price, determined by supply and demand, is a reflection of many things, including current interest rates, economic performance, sentiment towards ongoing political situations (both locally and internationally), as well as the perception of the future performance of one currency against another. It is a bilateral transaction by which one party delivers an agreed-upon currency amount to the counter party and receives a specified amount of another currency at the agreed-upon exchange rate value.

Futures Markets
In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets, such as the Chicago Mercantile Exchange. In the U.S., the National Futures Association regulates the futures market. Futures contracts have specific details, including the number of units being traded, delivery and settlement dates.

What is a Forex Chart?

Forex trading involves the sale of a currency, and the simultaneous purchase of another with the purpose of closing the position at a later time with a profit. Unlike in the stock or commodities markets where prices are routinely quoted in USD, the price of a currency can be quoted in any other currency due to the essentially bartering nature of currency transactions where live, as well as historical forex charts are used to identifytrends and entry /exits points for trades.

The forex market is the most liquid and active market in the world. At every single second an enormous amount of transactions gets executed, with the total daily turnover being regularly estimated to reach trillions of dollars. If we did not make use of an analytical tool such as a forex chart to place the data into a more compact form where it can be visually examined and analyzed, we would be in possession of a vast sea of difficult to interpret numbers. The forex trading chart, then, is a visual aid that makes the recognization of trends, and patterns in general easier, and makes the application of technical tools of analysis at all possible.

Charts are categorized according to the way price action is depicted as well as the time frame of the period being examined. Imagine that we have 4-hourly candlestick chart of the EURUSD pair. This means that each candlestick on the graph presents the price data of a four-hour long period in a compact form. What happens inside that time period is irrelevant. If we had chosen an hourly chart, each candlestick on the chart above would be replaced by four different candlesticks.

There are many ways of depicting the price action on a forex trading chart. Bar charts, candlestick charts, line forex trading charts are a few of the many options available, with each offering its own advantages in some aspect of analysis and utility. But they all do the same thing: they plot the prices of a day (or some mathematical manipulation of the price data) to the time series on the horizontal axis which is then used by traders to evaluate and understand the market action for the purpose of making a profit.

Since currencies are traded in pairs, it’s impractical and not very useful to draw a pure USD forex chart. Instead we have the option of drawing (or rather having the software plot for us) a chart of the USDJPY pair, or the AUDUSD pair, since it is only possible to quote a currency in terms of another. On the other hand, there are some forex charts that take weighted average of such currency pairs to derive an overall index for a currency. The famous USD index, is a good example.

Charts are the keys that allow us to unlock the secrets of forex trading. The subject covers a vast ground, and only by continuous practice can we expect to acquire the necessity fluency and expertise in evaluating them. The language of forex charts is really the language of currency trading. It will take some time to learn it, but when you are a native speaker, so to speak, your imagination and creativity are the only limits to your potential.

The Bid and Ask in the Forex Market

The Forex Bid Price
The Forex bid is the price at which the Forex trading online investors are prepared to buy a certain Forex currency pair for. This is the price that is set for the selling of the trader's base currency. The bid price is seen on the left side of the Forex quote. For example, for the EUR/USD quote 1.2728/31, the bid price is 1.2728. This means you can sell one Euro for $1.2728.

The Forex Ask Price
The ask price is the price at which the market is willing to sell the currency pair. This is the price that is set for the buying of the currency pair by the trader. When you place a Forex order, The ask price is seen on the right side of the Forex trading quote. In the previous example of the EUR/USD 1.2728/31, the ask price is 1.2731. It means you can buy 1 Euro for $1.2731.

The Forex Bid-Ask Spread
The bid ask spread is the difference between the bid and the ask price, or the amount by which the ask price is larger than the bid price. This is the difference between the highest figure the buyer is willing to buy the Forex currency and the lowest price the seller is willing to sell it. For example, if the bid price is $1 and the ask price is $1.1, then the bid-ask spread is $0.1. The Forex trading bid ask spread is usually worth only a few Forex pips, because the online Forex has large liquidity.

How To Read Forex Charts ?

Learning the basic skills in Forex, such as how to read Forex charts, is really important.

This is because once you have this vital skill under your belt, it will be a lot easier and quicker when the time comes for you to learn and practice an actual Forex trading system.

By the time you finish this article, you'll learn how to read Forex charts, as well as know the pitfalls that can occur when reading them, especially if you haven't traded forex before.

Firstly, let's revise the basics of a forex trading as this relates directly to how to reade forex charts.

Each currency pair is always quoted in the same way. For example, the EURUSD currency pair is always as EURUSD, with the EUR being the base currency, and the USD being the terms currency, not the other way round with the USD first. Therefore if the chart of the EURUSD shows that the current price is fluctuating around 1.2155, this means that 1 EURO will buy around 1.2155 US dollars.


And your trade size (face value) is the amount of base currency that you're trading. In this example, if you want to buy 100 000 EURUSD, you're buying 100 000 EUROs.

Now let's have a look at the 5 important steps on how to read a forex chart:

1. If you buy the currency pair, that is, you're long the position, realise that you're looking for the chart of that currency pair to go up, to make a profit on the trade. That is, you want the base currency to strengthen against the terms currency.

On the other hand if you sell the currency pair to short the position, then you're looking for the chart of that currency pair to go down, to make a profit. That is, you want the base currency to weaken against the terms currency.

Pretty simple so far.

2. Always check the time frame displayed. Many trading systems will use multiple time frames to determine the entry of a trade. For example, a system may use a 4 hour and a 30 minute chart to determine the overall trend of the currency pair by using indicators such as MACD, momentum, or support and resistance lines, and then a 5 minute chart to look for a rise from a temporary dip to determine the actual entry.

So ensure that the chart you're looking at has the correct time frame for your analysis. The best way to do this is to set up your charts with the correct time frames and indicators on them for the system you're trading, and to save and reuse this layout.

3. On most forex charts, it is the BID price rather than the ask price that's displayed on the chart. Remember that a price is always quoted with a bid and an ask (or offer). For example, the current price of EURUSD may be 1.2055 bid and 1.2058 ask (or offer). When you buy, you buy at the ask, which is the higher of the 2 prices in the spread, and when you sell, you sell at the bid, which is the lower of the two prices.

If you use the chart price to determine an entry or exit, realise that when you place an order to sell when the chart price is say 1.330, then this is the price that you'll sell at assuming no slippage.

If on the other hand, you place an order to buy when the chart price is the same price, then you'll actually buy at 1.3333. A forex system will often determine whether your orders will be placed simply according to the chart price or whether you need to add a buffer when buying or selling.

Also note that on many platforms, when you're placing stop orders (to buy if the price rises above a certain price, or sell when the price falls below a certain price) you can select either "stop if bid" or "stop if offered".

4. Realise that the times shown on the bottom of forex charts are set to the particular time zone that the forex provider's charts are set to, be it GMT, New York time, or other time zones.

It's handy to have a world clock available on your computer desktop in order to convert the different time zones. This is important when you're trading major economic announcements.

You'll need to convert the time of an announcement to your local time, and the chart time, so you'll know when the announcement is going to happen, and therefore when you need to trade.

5. Finally, check whether the times on your forex charts corresponds to when the candle opens or when the candle closes. Your charting software may be different to someone else's in this way.

The reason I mention this, is that if you need to trade major economic announcements, either by entering a trade based on the movements that happen after the announcement, or to exit a trade before the announcement in avoid getting stopped out during it, then you need to be precise (to the minute!) as these trades are performed according to what happens at the 1 minute immediately after the announcement, not the candle afterwards!

So there you have it.

You now have the 5 essential keys to how to properly read forex charts, which will help you to avoid the common mistakes which many forex beginners make when looking at charts, and which will speed up your progress when you're looking at forex charting packages, and forex trading systems that you want to trade!

Now that you know this, practice looking at forex charts with each of these 5 points in mind.

So get to it!

Forex Glossary

Aggressor: A trader dealing on an existing price in the market.
Appreciation: The increase in the value of an asset.
Arbitrage: Profiting from differences in the price of a single currency pair that is traded on more than one market.
Ask: The price at which a currency pair or security is offered for sale; the quoted price at which an investor can buy a currency pair. This is also known as the 'offer', 'ask price', and 'ask rate'.
Ask Price: See 'ask'.
Ask Rate: See 'ask'.
Asset: An item having commercial or exchange value.
Back Office: The office location, or department, where the processing of financial transactions takes place.
Base Currency: In terms of foreign exchange trading, currencies are quoted in terms of a currency pair. The first currency in the pair is the base currency. The base currency is the currency against which exchange rates are generally quoted in a given country. Examples: USD/JPY, the US Dollar is the base currency; EUR/USD, the EURO is the base currency.
Bear Market: An extended period of general price decline in an individual security, an asset, or a market.
Bid: The price at which an investor can place an order to buy a currency pair; the quoted price where an investor can sell a currency pair. This is also known as the 'bid price' and 'bid rate'.
Bid/Ask Spread: The point difference between the bid and offer (ask) price.
Big Figure: The first two or three digits of a foreign exchange price or rate. Examples: USD/JPY rate of 108.05/10 the big figure is 108. EUR/USD price of .8325/28 the big figure is .83
Bull Market: A market which is on a consistent upward trend.
Buy Limit Order: An order to execute a transaction at a specified price (the limit) or lower.
Buy On Margin: The process of buying a currency pair where a client pays cash for part of the overall value of the position. The word margin refers to the portion the investor puts up rather than the portion that is borrowed.
Cable: The British pound/US Dollar exchange rate GBP/USD.
Candlestick Chart: A chart that displays the daily trading price range (open, high, low and close).
Carry (Interest-Rate Carry): The income or cost associated with keeping a foreign exchange position overnight. This is derived when the currency pairs in the position have different interest rates for the same period of time.
Central Bank: A bank, administered by a national government, which regulates the behavior of financial institutions within its borders and carries out monetary policy.
Chartist: A person who attempts to predict prices by analyzing past price movements as recorded on a chart.
Closing a Position: The process of selling or buying a foreign exchange position resulting in the liquidation (squaring up) of the position.
Closing Market Rate: The rate at which a position can be closed based on the market price at end of the day.
Commission: The fee levied by an institution to undertake a trade on behalf of a customer.
Confirmation: Written acknowledgment of a trade, listing important details such as the date, the size of the transaction, the price, the commission, and the amount of money involved.
Counterpart: A participant in a financial transaction.
Cross-Rate: The exchange rate between 2 currencies where neither of the currencies are USD.
Currency: Money issued by a government.
Currency Pair: The two currencies that make up a foreign exchange rate. IE: USD/YEN.
Currency Risk: The possibility of an unfavorable change in exchange rates.
Day Order: A buy or sell order that will expire automatically at the end of the trading day on which it is entered.
Day Trade: A trade opened and closed on the same trading day.
Day Trader: A trader who buys and sells on the basis of small short-term price movements.
Day Trading: Refers to a style or type of trading where trade positions are opened and closed during the same day.
Dealer: An individual or firm that buys and sells assets from their portfolio, acting as a principal or counterpart to a transaction.
Depreciation: A fall in the value of a currency due to market forces.
Devaluation: The act by a government to reduce the external value of its currency.
Discretionary Account: An account in which the customer permits a trading institution to act on the customer's behalf in buying and selling currency pairs. The institution has discretion as to the choice of currency pairs, prices, and timing-subject to any limitations specified in the agreement.
Euro: The common currency adopted by eleven European nations(Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Italy, Spain and Portugal) on January 1, 1999.
European Central Bank (ECB): The Central Bank for the new European Monetary Union.
Execution: The Process of completing an order or deal.
Federal Deposit Insurance Corporation (FDIC): The regulatory agency responsible for administering bank depository insurance in the United States.
Federal Reserve (Fed): The Central Bank of the United States.
Fill: The process of completing a customer's order to buy or sell a currency pair.
Fill Price: The price at which a buy or sell order was executed.
Financial Risk: The risk that a firm will be unable to meet its financial obligations.
Flat: Term describing a trading book with no market exposure.
Forward: A transaction that settles at a future date.
Forward Points: The points that are added to or subtracted from the spot rate to calculate the forward rates for a forward foreign exchange transaction. These points are based on the differential between the interest rates of the two currency pairs.
Forward Price: (See forward rates).
Forward Rates: The net price resulting from calculating the forward points and subtracting them from the existing spot rate. This is the rate at which a currency can be purchased or sold for delivery in the future.
Good Till Cancelled Order (GTC): A buy or sell order which remains open until it is filled or canceled.
Hedge: A transaction that reduces the risk on an existing investment position.
Initial Margin: The deposit a customer needs to make before being allocated a trading limit.
Initial Margin Requirement: The minimum portion of a new security purchase that an investor must pay for in cash.
Jobber: A trader who trades for small, short-term profits during the course of a trading session, rarely carrying a position overnight.
Limit Order: An order to execute a transaction at a specified price (the limit) or better. A limit order to buy would be at the limit or lower, and a limit order to sell would be at the limit or higher.
Liquidity: Refers to the relationship between transaction size and price movements. For example, a market is "liquid" if large transactions can occur with only minimal price changes.
Long: See long position.
Long Position: In foreign exchange, when a currency pair is bought, it is understood that the primary currency in the pair is 'long', and the secondary currency is 'short'.
Maintenance: A set minimum margin that a customer must maintain in his margin account
Margin: The amount of money needed to maintain a position.
Margin Account: An account that allows leverage buying on credit and borrowing on currencies already in the account. Buying on credit and borrowing are subject to standards established by the firm carrying the account. Interest is charged on any borrowed funds and only for the period of time that the loan is outstanding.
Margin Call: A call for additional funds in a margin account either because the value of equity in the account has fallen below a required minimum (also termed a maintenance call) or because additional currencies have been purchased (or sold short).
Mark-to-Market: The theoretical value of an open position at the current market price.
Market Close: This refers to the time of day that a market closes. In the 24 hour-a-day foreign exchange market, there is no official market close. 5:00 PM EST is often referred to and understood as the market close because value dates for spot transactions change to the next new value date at that time.
Market-Maker: A person or firm that provides liquidity making two-sided prices (bids and offers) in the market.
Market Order: A customer order for immediate execution at the best price available when the order reaches the marketplace.
Market Rate: The current quote of a currency pair.
Market Risk: The risks that occur when general market pressures cause the value of an investment to fluctuate.
Maturity: The date on which payment of a financial obligation is due.
Momentum: The tendency of a currency pair to continue movement in a single direction.
OCO-One Cancels the Other Order: A combination of two orders in which the execution of either one automatically cancels the other.
Offer: The price at which a currency pair or security is for sale; the quoted price at which an investor can buy a currency pair. This is also known as the 'ask', 'ask price', and 'ask rate'.
Open Order: Buy or sell order that remains in force until executed or cancelled by the customer.
Open Position: Any position (long or short) that is subject to market fluctuations and has not been closed out by a corresponding opposite transaction.
Order: A customer's instructions to buy or sell currencies.
Overnight Position: Trader's long or short position in a currency at the end of a trading day.
Pip: The smallest increment of change in a foreign currency price, either up or down.
Price: The price at which the underlying currency can be bought or sold.
Price Transparency: The ability of all market participants to "see" or deal at the same price.
Principal Value: The original amount invested by the client.
Quote: A simultaneous bid and offer in a currency pair.
Rate: Price at which a currency can be purchased or sold against another currency.
Resistance: Price level at which technical analysts note persistent selling of a currency.
Revaluation: Daily calculation of potential profits or losses on open positions based on the difference between the settlement price of the previous trading day and the current trading day.
Risk (Foreign Exchange Risk): The risk that the exchange rate on a foreign currency will move against the position held by an investor such that the value of the investment is reduced.
Risk Management: The employment of financial analysis and use of trading techniques to reduce and/or control exposure to financial risk.
Roll-Over: The process of extending the settlement value date on an open position forward to the next valid value date.
Sell Limit Order: An order to execute a transaction only at a specified price (the limit) or higher.
Selling Short: A situation where a currency has been sold with the intent of buying back the position at a lower price to make a profit.
Settlement: The actual delivery of currencies made on the maturity date of a trade.
Short: See short position.
Short position: In foreign exchange, when a currency pair is sold, the position is said to be short. It is understood that the primary currency in the pair is 'short', and the secondary currency is 'long'.
Short Squeeze: The pressure on short sellers to cover their positions as a result of sharp price increases.
Spot Market: Market where people buy and sell actual financial instruments (currencies) for two-day delivery.
Spot/Next or S/N roll: The process of moving the spot settlement value date on an open position forward to the next valid value date. This process will affect the profit or loss on the overnight position. The forward points reflect the difference in interest rates between the currencies being rolled over.
Spot Price: The current market price of a currency that normally settles in 2 business days (1 day for Dollar/Canada).
Spread: This point or pip difference between the bid and ask price of a currency pair.
Sterling: Another term for the British currency, 'The Pound'.
Stop (loss) Order: Order to buy or sell when a given price is reached or passed to liquidate part or all of an existing position.
Stop Order (or stop): An order to buy or to sell a currency when the currency's price reaches or passes a specified level.
Support Levels: A price at which a currency or the currency market will receive considerable buying pressure.
Swap: A transaction which moves the maturity date of an open position to a future date.
Take Profit Order: A customer's instructions to buy or sell a currency pair which, when executed, will result in the reduction in the size of the existing position and show a profit on said position.
Tick: The smallest possible change in a price, either up or down.
Tomorrow Next (Tom/Next), (T/N), T/N Roll: The process of moving the settlement value date on an open position forward from one business day after the trade date (tomorrow), to the next valid value date (next), the spot value date.
Transaction Date: The date on which a trade occurs.
Turnover: The total volume of all executed transactions in a given time period.
Two-Way Price: A quote in the foreign exchange market that indicates a bid and an offer.
Value Date: The maturity date of the currency for settlement, usually two business days (one day for Canada) after the trade has occurred.
Variation Margin: Funds, which are required to bring the equity in an account back up to the initial margin level, calculated on a day-to-day basis.
Volatility (VOL): Statistical measure of the change in price of a financial currency pair over a given time period.
Yard: A slang word used in the currency industry meaning 'billion'.