Getting Started in the Forex Market
Forex is simply the simultaneous buying of one currency and selling of another—with no complex calculations to memorize and understand.
Forex prices are quoted in pairs. One example of a forex pair is the EUR/USD, which is simply the Euro and the US dollar. Another pair is the USD/JPY, which is the US dollar and the Japanese yen. With each pair, a trader concurrently buys one currency and sells the other.
Pricing
Pricing in forex is similar to that of any other market. There is a price at which participants are willing buy the currency pair and a price at which they are willing to sell. A buy and sell creates a two-sided price representing the bid and ask. The difference is called the spread.
How does a quote look in forex? Lets say the EUR/USD is quoted at 1.4600 / 02. The bid price of 1.4600 is the price that you can sell the EUR and buy the USD. The ask price of 1.4602 is the price that you can buy the EUR and sell the USD.
Note that in forex trading, the spread is measured in pips, which is the smallest decimal figure in a currency rate. For USD/JPY, a pip would equal .01 (or the rough equivalent of $8 on $100,000). For a GBP/USD, a pip equals .0001 (or the rough equivalent of $10 on $100,000).
Example 1
Let’s use an example to illustrate a basic forex trade. Say you believe the US dollar will strengthen against the Canadian dollar. In this case, you would buy (go long) the USD/CAD (buy the US dollar and sell the Canadian dollar).
1. Look at the buy price and sell price: The buy price is the price at which you are willing to buy the currency pair and the counterparty is willing to sell. Thus in the formula 1.0510 / 13, it is the 1.0513. The sell price is the price at which you are willing to sell a currency pair and the counterparty is willing to buy. In the formula 1.0510 / 13, it is the 1.0510. (Note that in order to simplify the forex transaction, ACM USA uses the terms “buy” and “sell” instead of the traditional “bid” and “offer.”)
2. Going short vs. Going long: A trade is short when a trader sells the USD/CAD currency pair and long when the trader buys the USD/CAD currency pair. In the example above you believe the US dollar will appreciate, accordingly you would buy the USD/CAD currency pair at 1.0513. The first currency listed in a currency pair (EUR for EUR/USD) is the base currency. If you believe this currency will augment in value relative to the counter currency (USD for EUR/USD), you would buy (go long) the pair. However, if you believed the dollar was going to augment in value relative to the Euro, you would sell the currency pair (go short).
3. Determine a trade size: Picking the correct trade size is a critical part of risk management. While ACM USA traders can trade on a margin of 100:1—meaning a $50,000 account can trade up to $5,000,000—we encourage traders to use this tool responsibly. For our example, we’ll assume you are trading at a 5% margin with $1,000,000.
4. Review the spread: As with any asset class, the spread represents the difference between the buy price and the sell price. In the example above, you could sell at 1.0510 and buy at 1.0513, which gives you a 3 pip spread. The spread, of course, is not fixed; it can fluctuate due to changes in volatility and liquidity.
5. Make the trade: So now let’s assume you are long $1,000,000 USD/CAD at 1.0513. If the spot price appreciates to 1.0563 / 66, you can sell at 1.0563 (1.0563 – 1.0513) for a 50 pip gain or $4732.16 profit. If the spot price depreciates to 1.0463 / 66, you could sell at 1.0463 (1.0463-1.0513) for a 50 pip loss or $4777.37 hit. If the spot price remains flat at 1.0510 / 1.0513, you could sell at 1.0510 for a small 3 pip loss or just collect the daily rollover. Note: The profit and loss are different in the above example. The reason for this is that any profit or loss incurred in this transaction was in CAD. As the value of the CAD changed relative to the dollar, so did the value of each pip.
Example 2
Let’s say you believe the US dollar will strengthen against the Swiss franc. In this case, you would buy (go long) the USD/CHF (buy the USD dollar and sell the Swiss franc). The quoted price for this trade is 1.0364 / 1.0367. Using a $5,000 outlay at 1% margin, you buy $400,000 of the position at the ask price 1.0367.
Now, let’s say the quoted price moves to 1.0407 / 1.0410. You decide to take a profit and close the position. The trade will thus close at the sell at the bid price 1.0407.
| Position Summary |
| Bid / Ask Price |
1.0407 / 1.0410 |
| Buy Price |
1.0367 |
| Trade Amount |
$400,000 |
| Profit (loss) in Pips |
40 pips |
| Profit (/ Loss |
1,600 CHF
$1,537 profit |
Profit & Loss (P&L) Calculations
Your P&L for every position is calculated in real-time on the ACM USA trading platform. This lets you track your P&L as the market fluctuates. But, if you would like to do the math, here’s how: (We will use the above example).
1). Trade Amount x (sell price – buy price) = Profit or Loss (denominated in the secondary currency)
400,000 x |(1.0407 - 1.0367)| = 400,000 x .0040 = CHF 1,600 profit
1,600 CHF
1.0367
CHF/USD (We use the buy price as we’re selling our Swiss Francs and buying dollars) = $1543.36 profit
2). Let’s say that you went short the USD/JPY at 106.30, then bought it at 106.00, for a 30 pip profit.
Trade Amount x (bid (sell) price – ask (buy) price) = Profit or Loss (denominated in the secondary currency)
500,000 x |(106.30 – 106.00)| = 500,000 x .30 = JPY 150,000 profit
Now, you would need to convert JPY 150,000 into USD. We’ll take the buy price of 106.00 as our conversion rate.
150,000 JPY
106 JPY/USD (We use the buy price as we’re selling Japanese Yen and buying dollars) = $1415.09 profit
Traders should understand that the example above is a random case scenario and in no way is meant to suggest that the potential for profit is greater than the potential for loss in foreign exchange trading.
Simplified P&L Calculations
Approximate US dollar values for a 1 pip move per contract in our traded currency pairs are as follows, per 100,000 units of the base currency:
| Currency pairs |
1 pip |
1 pip move per 100k (lot) |
| EURUSD |
.0001 |
EUR 100,000 x .0001 = USD 10.00
|
| USDJPY |
.01 |
USD 100,000 x .01 = JPY 1,000 /
spot = approx USD 9.7 |
| USDCHF |
.0001 |
USD 100,000 x .0001= CHF 10.00 /
spot = approx USD 8.5 |
| GBPUSD |
.0001 |
GBP 100,000 x .0001 = USD 10.00 |
| EURJPY |
.01 |
EUR 100,000 x .01 = JPY 1,000 /
spot = approx USD 9.7 |
| EURCHF |
.0001 |
EUR 100,000 x .0001 = CHF 10.00 /
spot = approx USD 8.5 |
| EURGBP |
.0001 |
EUR 100,000 x .0001 = GBP 10.00 /
spot = approx USD 19.00 |
| GBPJPY |
.01 |
GBP 100,000 x .01 = JPY 1,000 /
spot = approx USD 9.7 |
| GBPCHF |
.0001 |
GBP 100,000 x .0001 = CHF 10.00 /
spot = approx USD 8.5 |
| CHFJPY |
.0001 |
CHF 100,000 x .01 = JPY 1,000 /
spot = approx USD 9.7 |
| USDCAD |
.0001 |
USD 100,000 x .0001= CAD 10.00 /
spot = approx USD 8.00 |
| AUDUSD |
.0001 |
AUD 100,000 x .0001 = USD 10.00 |
| USDSEK |
0.001 |
USD 100,000 x .001= /
spot = approx USD 1.6 |
| USDNOK |
.0001 |
USD 100,000 x .0001= /
spot = approx USD 1.6 |
| AUDJPY |
.01 |
USD 100,000 x .0001= /
spot = approx USD 9.7 |
On a typical day, liquid currency pairs like EUR/USD and USD/JPY can fluctuate a full point (0.0100, or 100 pips). On a EUR 1,000,000 position a full point on EUR/USD equates to 10,000 USD.
For assistance calculating your profit and loss, please contact our customer service desk at support@acmusa.com
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