FOREX FREQUENTLY ASKED QUESTIONS
A pip is the minimum movement of a currency upwards or downwards. To calculate each pip for every currency, divide 1/ (currency pair exchange rate) Ex: 1/224.92 (GBP/JPY) = 0.00444 GBP. If you’re trading a 100:1 leverage account, then multiply this with 100. Ex 0.00444 x 1000 = 4.44 GBP. To transform this to USD just convert it. Ex: GBP/USD = 1.9377 x 4.444 = 8.6 USD / pip.
Another example is to calculate a pip for GBP/USD. 1/1.9377 = 0.516 GBP. For a 100:1 standard account, multiply that with 10. Ex: 0.516 x 10 = 5.16. To convert in USD multiply with 1.9377. Ex: 5.16 x 1.9377 = 9.98 USD / pip.
A standard lot is a buy or sell size. If you buy 1 lot of EUR/USD, trading at 100:1 leverage then you buy 100,000 EUR/USD. But since you’re trading with 100:1, the leveraged value is 1,000 EUR/USD or 1 standard lot. If you trade a mini lot, then you buy 10,000 EUR/USD and the leveraged value is 100 EUR/USD or 1 mini lot.
You would like to speculate on the level of the US 500 (SPI), an index tracking the 500 largest US stocks. Note: all prices are in USD.
The index trades currently at 1860.00 points.
A standard contract for the US 500 is 50 times the index trade rate. So the current value of a US 500 contract is 50 x 1860.00 = $93,000.
You decide that the American economy will improve and that US stocks will appreciate.
So you buy one contract and as you predict, the US 500 rises to 1865.00.
As you are trading on margin (with leverage), you only need to put up a fraction of the whole price as collateral.
The contract is now worth 50 x 1865 = $93,250.
You close the position at 1865.00 and make a profit of $250.
You would like to speculate on the price of oil and decide to trade Brent Crude (BRT). Note: all prices are in USD.
BRT currently trades at $108.00 per barrel.
A standard contract for BRT is 1,000 barrels.
So the current value of a BRT contract is 1,000 x 108.00 = $108,000.
You decide that consumers are moving to more fuel efficient cars and that demand for BRT will drop. So you expect that this may push down the price of BRT.
You sell one contract and as you predicted Brent falls to $107.00 per barrel
As you are trading on margin (with leverage) you only need to put up a fraction of the whole price as collateral.
The contract is now worth 1000 x 107.00 = 107,000.
You close the position at 107.00 and make a profit of $1,000.
CFD trading gives you a wider choice of products to access the excitement of the financial markets. Whether you have insights into agriculture, energy products, global currencies or equities, you can now get easy access to trade them. Trade CFDs with a low margin requirement (remember – with greater leverage comes greater profit or loss). CFDs provide an excellent alternative to suit a variety of trading styles or methods e.g. short or long-term investors can find the right product to complement their preferences.
By trading CFDs, you can potentially profit whether a market moves up or down. If you believe an asset’s price is going to rise, you open a buy position (known as ‘going long’). If you think the asset’s price is going to fall, you open a sell position (known as ‘going short’). The performance of the market governs not just whether you make a profit or loss, but also by how much. So let’s say you think a particular market will rise, and you buy a CFD – your profit will be greater the further the market rises, and your losses greater the further it declines. The same rule applies if you expect a market to fall; you’ll make more the further the market drops, and lose more the further the market rises.
A contract for difference (CFD) is a contract between a buyer and a seller. When you open a CFD you are either buying or selling a contract with a forex broker. CFDs are the easiest and most popular way to trade commodities and indices due to their simplicity, ease of trade, leverage, ability to short sell and cost effectiveness. You can diversify your portfolio by trading CFDs on all Forex platforms as both spot deals and options
Like forex, CFD trading is cash-settled. When you buy a CFD you are buying a contract for a certain price; you don’t take possession of the physical product, e.g. when you buy 100 barrels of oil these will not be delivered to your door. And when the time comes to sell it back, you make a profit (or loss if the market is not in your favour).