Calculating Profit and Loss

Example 1:

Imagine the current bid/ask for EUR/USD is EUR/USD: 1.2836/39, meaning a trader can buy 1 euro for 1.2839 or sell 1 euro for 1.2836.

Suppose a trader decides that the Euro is undervalued against the US dollar and expects the value of the Euro to rise. To execute this strategy, a trader would buy Euros (simultaneously selling dollars), and then wait for the exchange rate to rise.

Therefore, the trader places the order to buy 100,000 Euros and pays 128,390 dollars (100,000 x 1.2839) for that order. Remember, at a leverage rate of 400:1, the traders deposit would be approximately $321 for this trade.

As expected, the Euro strengthens to 1.2842/44. Now, to realize the profits, the trader places an order to sell 100,000 Euros at the current rate of 1.2842, and receive 128,420 dollars for that trade.

The trader bought 100k Euros at 1.2839, paying $128,390. Then the trader sold 100k Euros at 1.2842, receiving $128,420. That is a difference of 3 pips, or in dollar terms ($128,420 – 128,390 = $30).

Total profit = US $30 on a deposit of $321

Example 2:

Now in this example, imagine the trader once again buys EUR/USD when trading at 1.2836/39. Just as before, the trader buys 100,000 Euros and pays 128,390 dollars (100,000 x 1.2839).

However, the Euro weakens to 1.2833/36. Now, to minimize loses, the trader sells 100,000 Euros at 1.2833 and receives $128,330.

In this case, the trader bought 100k Euros at 1.2839, paying $128,390 and sold 100k Euros at 1.2833, receiving $128,330. That is a difference of 6 pips, or in dollar terms ($128,390 - 128,330 = $60).

Total loss = US $60

Orders and Trades

Generally speaking, there are three types of Forex orders:

1. Market order – an order to buy or sell a currency

2. Limit order – an order to capture gains from advantageous market movements

3. Stop order – an order to forego further losses from disadvantageous market movements

If a trader believes the value of a base currency will increase relative to its pair, the trader should place a Market Order to buy the currency at its “Ask” price. However, in order to protect against the risk of significant losses, a prudent trader will simultaneously place a Stop Order to sell the currency if the “Bid” price drops to a certain level. In addition, in order to capture profits, a trader will often place a Limit Order to sell the currency if the “Bid” price rises to a certain level.

In contrast, if a trader believes the value of a base currency will decrease relative to its pair, the trader should place a Market Order to sell the currency at its “Bid” price. However, in order to protect against the risk of significant losses, a prudent trader will simultaneously place a Stop Order to buy the currency if the “Ask” price rises to a certain level. In addition, in order to capture profits, a trader will often place a Limit Order to buy the currency if the “Ask” price drops to a certain level.

Therefore, prudent Forex trading would suggest that every “buy” order be coupled with two “sell” orders; and every “sell” order be coupled with two “buy” orders.

Candlestick Charts

A candlestick chart shows how currency pairs fluctuate in relative value over time. The x axis shows time in what ever increment a trader wants to see it. It could be minutes, hours, days or even weeks. The y axis shows the value of one base currency unit relative to the other currency in the pair. The candlestick chart below shows EUR/USD at five minute intervals over four hours.

The body of the chart shows blue and red rectangles - which are the "candlesticks". When the candlestick is blue, it means the value of the base currency has increased relative to its pair in that time interval. For blue candlesticks, the bottom edge is the opening price and the top edge is the closing price in the time interval.

When the candlestick is red, it means the value of the base currency has decreased relative to its pair in that time interval. For red candlesticks, the top edge is the opening price and the bottom edge is the closing price in the time interval.

The thin lines protruding from the top and bottom of the rectangles are called “wicks” or “tails” or “shadows”. They display the high and low prices of the base currency relative to its pair in that time interval.

Most often, we see “Bid” charts – which shows the price of selling the base currency relative to its pair. But a trader can also choose to display "Ask" charts - which show the price of buying the base currency relative to its pair.

Leverage & Margin

Leverage trading, or trading on margin, means a trader is not required to put up the full value of the position. But there are some important distinctions between trading stocks on margin and trading Forex on margin.

When stocks trade on margin, the leverage ratios are in the range of 2:1 or 4:1 – meaning a trader would only have to deposit $10,000 to the trader’s account in order to trade stocks worth $20,000 or $40,000 respectively. However, this kind of leverage requires the stock trader to be approved for “credit” for the amount invested that is in excess of what is deposited. Moreover, if the value of the stocks falls to a certain level, a stock trader trading on margin may have to pay additional funds than originally deposited to cover the losses.

Forex trading offers more leverage than stocks or futures - up to 400 times the value of the deposited funds in the Forex trading account. Therefore, at 400:1 leverage, a trader need only put up $25 to trade $10,000 worth of a currency. However, unlike trading in stocks, Forex traders do not need credit approval to trade on margin. If the value of the Forex positions falls to a certain level, ICM will close out all positions so a trader will never owe more money than what the trader initially deposited.

Keep in mind that increased leverage increases both a trader's opportunity and risk. For example, at 400:1 leverage, a change of 1% in the underlying value of the trade will result in a gain or loss of 400% on the underlying deposit.

Currency Quotes

Reading a foreign exchange quote is simple if you remember two things:

1. The first currency listed is the base currency

2. The value of the base currency is always 1

A currency pair quote is comprised of a bid/ask price expressed in the following format:

EUR/USD: 1.2836 / 1.2839 or EUR/USD: 1.2836/39

The first number in the series represents the bid price, the cost of selling the Euro against the Dollar, or going ‘short' on the Euro.

The second number represents the ask price, the cost of buying the Euro against the dollar, or going ‘long’ on the Euro.

The difference between the ask price and the bid price is called the pip spread.

What is a pip?

A pip (or “percentage in point”) is the smallest unit of measure for any currency. In most currencies, this is the fourth digit after the decimal point and is equal to 1/100th of 1% or .0001. So, using the example above (EUR/USD: 1.2836 1.2839), the spread is 3 pips (39 – 36).

NOTE: For Japanese yen, pips refer to the second digit after the decimal point. This is the only exception among the major currencies.

FOREX Basics

"Forex" stands for foreign exchange; it's also known as FX. It is the buying and selling of currencies. Unlike stocks or futures, there's no centralized exchange for Forex. All transactions happen via phone or electronic network. Because of this, Forex is among the most liquid of trading instruments. In fact, the daily trading volume of currencies is $ 3.2 Trillion – which is more than all other world market exchange trading combined!

More than 85% of Forex trading volume occurs in the “Major” currencies: US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.

In a Forex transaction, currencies trade in pairs. Therefore, a trader buys one currency while simultaneously selling its pair. That is, a trader exchanges the sold currency for the one being bought. So when a trader trades Euro-US Dollar (EUR/USD), the trader is actually exchanging the Euro for the US Dollar or vice versa. And when a trader trades US Dollar / Japanese Yen (USD/JPY), the trader is actually exchanging the US Dollars for Japanese Yen or vice versa.

The chart below displays some major and minor currency pairs and their associated trading terminology.

Symbol		Currency Pair		Trading Terminology
GBPUSD		British Pound / US Dollar		"Cable"
EURUSD		Euro / US Dollar		"Euro"
USDJPY		US Dollar / Japanese Yen		"Dollar Yen"
USDCHF		US Dollar / Swiss Franc		"Dollar Swiss", or "Swissy"
USDCAD		US Dollar / Canadian Dollar		"Dollar Canada"
AUDUSD		Australian Dollar / US Dollar		"Aussie Dollar"
EURGBP		Euro / British Pound		"Euro Sterling"
EURJPY		Euro / Japanese Yen		"Euro Yen"
EURCHF		Euro / Swiss Franc		"Euro Swiss"
GBPCHF		British Pound / Swiss Franc		"Sterling Swiss"
GBPJPY		British Pound / Japanese Yen		"Sterling Yen"
CHFJPY		Swiss Franc / Japanese Yen		"Swiss Yen"
NZDUSD		New Zealand Dollar / US Dollar		"New Zealand Dollar" or "Kiwi"
USDZAR		US Dollar / South African Rand		"Dollar Zar" or "South African Rand"
GLDUSD		Spot Gold		"Gold"
SLVUSD		Spot Silver		"Silver"

Forex Automated Trade Signals

System summary

System Name:	Apical Ticks
Risk category:	Aggressive
Maximum DD:	24.24%
Profit Factor:	1.97

Currently Opened Positions:

Currency	S/B	Open	Stop	Limit	Time(EST)
GBPJPY	B	151.55	open	open	26/05/2009 23:53
EURUSD	B	1.3949	1.3866	open	28/05/2009 16:54
GBPJPY	B	154.96	open	open	28/05/2009 22:58
EURUSD	B	1.4006	1.3807	open	29/05/2009 06:54

Recently Closed Positions:

Currency	S/B	Opened	Closed	Date Opened	Date Closed	P/L

Current Month P/L: 4.39%

April P/L: 5.62%

March P/L: 11.11%

Note: Above performance results are based on LIVE trading.

Observations: All trades are generated automatically. Only portion of trades will be posted and will be updated with a delay due to human limitations.

Daily FX Forecast

Fri, May 29 2009, 08:59 GMT
by S.A.F.E Team

S.A.F.E. Ltd

• Download Full Daily Fx Forecast

Forex Market Outlook on Minors/Crosses

INTRADAY TRADING SIGNAL BY ACETRADER.COM :
AUD/USD: 0.7954

Last Update At 29 May 2009 09:38 GMT

As aussie has risen after finding renewed buying
at 0.7893, bullishness remains for upmove to extend
twds 0.7970/75, however, o/bot condition shud limit
upside to 0.7990/95 n risk fm there has increased
for a retreat later.

Trade fm long side, stop now as indicated, only
below 0.7893 wud signal temp. top is made, 0.7870..

Range Forecast
0.7935 / 0.7970

Resistance/Support
R: 0.7961/0.8000/0.8020
S: 0.7893/0.7830/0.7804

US Dollar Forecast Shifts on Trader Sentiment

EURUSD – Euro Forecast Unclear on Extremely Choppy Price Action
GBPUSD – British Pound Outlook Tentatively Bearish on Sharp Shift
USDCHF – Swiss Franc Expected to Rally Further Versus US Dollar
USDCAD – Canadian Dollar Forecast Remains Bullish Against US Dollar
USDJPY – Japanese Yen Forecast Unclear Against US Dollar

EURUSD – Euro Forecast Unclear on Extremely Choppy Price Action
GBPUSD – British Pound Outlook Tentatively Bearish on Sharp Shift
USDCHF – Swiss Franc Expected to Rally Further Versus US Dollar
USDCAD – Canadian Dollar Forecast Remains Bullish Against US Dollar
USDJPY – Japanese Yen Forecast Unclear Against US Dollar

While the SSI is available once a week on DailyFX.com, you can receive SSI readings twice a day in DailyFX Plus Forex Intraday Trading Signals

The SSI sought a EURUSD rally since 1.26 and was signaling a reversal around 1.60. Find our more in the DailyFX Forex Forum

05-28-09SSI01

Historical Charts of Speculative Forex Trading Positioning


05-28-09SSI02
EURUSD – Our forex trading signals recently went short the Euro against the US Dollar, as a sharp shift in sentiment gave contrarian signal to sell. The ratio of long to short positions in the EURUSD stands at -1.45 as nearly 59% of traders are short. Normally we would take a contrarian long position on the net-short ratio. Yet long positions are actually 15.6 percent stronger that last week, while shorts have fallen by 8.7 percent through the same period. The shift in crowd trading signals that further losses are likely, but price action remains extraordinarily choppy—advising caution against aggressive momentum trades.

Short-Term Forex Technical Outlook: NZD/USD

The New Zealand dollar continued to strengthen against its major counterparts, and rose to a fresh trend high against the greenback this week, and the high-yielding currency may continue to push higher over the near-term as market sentiment improves.

Currency Pair: NZD/USD
Chart: 60 Min Charts
Short-Term Bias: Flat

Analysis

The New Zealand dollar continued to strengthen against its major counterparts, and rose to a fresh trend high against the greenback this week, and the high-yielding currency may continue to push higher over the near-term as market sentiment improves. At the same time, expectations for a rate cut by the Reserve Bank of New Zealand paired with fears of a deepening downturn in the global economy is likely to weigh on the exchange rate in the month ahead, and we may see the pair retrace the three-month advance from March as the outlook for growth and inflation remains bleak. After reaching a high of 0.6954 in September, the NZD/USD slipped to a low of 0.4894 in March due to a rise in risk aversion however, the recent recovery in market sentiment continues to lead the exchange rate higher, and we may see pair continue to retrace the sell-off from the previous year as market participants move into higher risk/reward investments. Over the next few hours of trading, we may see the kiwi-dollar continue to push higher as global equities advance however, as the RSI approaches overbought territory, gains are likely to be capped, and we may see the pair fall lower to fill-in the gap from the 120 SMA before moving higher. Be sure to check out other reposts from DailyFX for additional information on the major currency pairs.

FOREX:Ringgit Likely To Trade Rangebound Next Week

The ringgit is expected to trade rangebound against the US dollar next week as investors are monitoring closely the movement of global economy, dealers said.

According to them, the local currency is expected to move between the 3.49 and 3.53 level against the greenback next week.

"The ringgit has potential to rise but if it did, it is not expected to breach the 3.53 level," one of the dealers said.

She said that throughout the week, the ringgit gained from the US dollar's weaknesses.

During the week, the ringgit was traded rangebound against the greenback but it strengthened during the last two days of the working week on concerns over the US government's growing debt.

On Thursday, Standard & Poor's lowered the United Kingdom's AAA outlook from "stable" to "negative" due to the government's deteriorating finances under the current economic climate.

"The news sparks fears among investors that the United States may face the same predicament," the dealer said.

On a week-to-week basis, the ringgit was higher against US dollar at 3.4900/4950 compared with the previous Friday's 3.5470/5520.

The local currency appreciated against the Singapore dollar to 2.4112/4168 from 2.4170/4226 last Friday and also against the Japanese yen to 3.7072/7130 from 3.7282/7350 previously.

Against the British pound, the ringgit weakened to 5.5173/5259 from 5.3858/3948 last Friday and it also went down against the euro to 4.8686/8769 from 4.8072/8151 previously.

Rupee may range between 47.30-48: Pinnacle Forex

On Tuesday, the rupee ended higher at Rs 47.77 per USD as against its previous close of Rs 47.91 per USD.

According to N Subramaniam, Pinnacle Forex, the abundant dollar liquidity is likely to cap the dollar rally against all currencies. This may support the rupee to stay within a range. The range for the day is seen between Rs 47.30-48.00 per dollar.

Rupee windfall awaits Ranbaxy in Q2

The rupee’s appreciation this week has come as a welcome reprieve for Ranbaxy Laboratories, the country’s largest drug maker, which finds itself

Malvinder Mohan Singh

saddled under huge mark-to-market forex losses. Ranbaxy chairman Malvinder Mohan Singh told ET Now in an exclusive interview that the company will be able to wipe out its forex losses this quarter and head back towards profitability. Excerpts from the interview.

Ranbaxy posted losses of over $150 million in the last quarter due to the mark-to-market hit on forex derivative contracts. What will rupee appreciation mean for you?

There are two key data points. If you look at our December 2008 results, we took a mark-to-market hit when the rupee was at 48 and in the March quarter of 2009 we took a mark-to-market loss when the rupee was at 50.50 to the dollar. Today, the rupee is at sub-48 levels. If the rupee remains at this rate as we go towards end of June and finish our second quarter, we will see us being able to write back as profits all the losses we had taken in the first quarter of 2009. If the rupee remains below 48, we will also be writing back some of the losses from December 2008 in the June quarter of this year and going forward.

What is the quantum of losses that you will write back as profits in the next quarter?

We had approximately $150 million of pre-tax forex losses in the first quarter of 2009. With the rupee at 48, that is the very least we will write back though the figure could be much higher depending upon how the rupee moves.

In dollar terms, revenues have dropped nearly 31% quarter-on-quarter in the US. What steps are you taking to revive US sales growth and what is your strategy to mitigate the impact of the US FDA ban?

If you look at the US market, the impact is because of the ongoing issues with the US FDA and the fact that we are not being able to supply key products out of our Indian facilities at Paonta Sahib and Dewas. What we have been doing is trying to move some of those products into our US facilities and also other people’s facilities which are FDA approved.

UPDATE 3-Nigeria's central bank lifting forex restrictions

Nigeria's central bank said on Friday it would return to a fully liberalised foreign exchange market over the next three months, allowing banks to freely trade among themselves after months of restrictions.

The relaxation of the restrictions is positive news for foreign investors who had been unnerved by a lack of clear commitment on when the return to a freely-determined exchange rate might come, analysts said.

The regulator said it was increasing the net foreign exchange open position for banks to 2.5 percent from 1 with immediate effect, a first step toward lifting measures brought in in February to stem the naira currency's sharp decline.

February's measures gave the central bank a tighter grip on the exchange rate by preventing banks from trading dollars among themselves but created a wide disparity with the parallel black market, the only alternative for U.S. dollar purchases.

Central Bank Governor Chukwuma Soludo said the monetary policy committee (MPC) had decided at a meeting on Thursday that the exchange rates had stabilised at both the official and parallel markets and that the mid-term outlook was now stable.

"Consequently, the MPC decided to review the series of controls it put in place a few months ago over the next three months and return to the fully liberalised regime we had before the recent controls," Soludo said.

"We believe that the premium between parallel and official exchange rates would narrow significantly in the days ahead. We can sustain the changes over time," he said.

At its daily foreign exchange auction on Thursday, the central bank sold naira at 146.63 to the dollar, while the local currency was trading on the black market at 182.

Soludo said the MPC had also decided to issue short-term treasury bills to try to mop up excess liquidity.

SWAN SONG?

Soludo's five-year term expires on May 29 and there has been intense speculation over whether President Umaru Yar'Adua will decide to reappoint him. For more see [ID:nLB99422].

The Leadership newspaper cited sources in the presidency on Friday as saying he would be replaced by Lamido Sanusi, the head of First Bank (FBNP.LG). [ID:nLB101900]

Some analysts said Soludo appeared to be attempting to reassert his reformist credentials with Friday's announcement.

February's measures came after the naira fell more than 20 percent against the dollar in two months as the world's eighth biggest oil exporter battled with lower foreign earnings caused by a weaker oil price CLc1 and the global economic downturn.

Pratice Trading is Crucial in Forex

Our inbox gets this message at least once a month: "I lost a lot of money when I first started trading, but after I got the hang of it I did better." We quickly learn that these people failed to include a vital step in their trading education: Practice.

And practice trading isn't just for newbies. Anytime you develop a new strading strategy, you MUST backtest and then practice trade before you try it in the live market. This is a lesson you can learn the easy way, or the hard way. Please, choose the easy way. (For more on backtesting, be sure to read: Backtesting Software for Forex Traders).

Article continues below. Click on the flags for analysis and charts for each pair.

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

GBP/JPY

EUR/JPY

Why would you not practice first?

Imagine you've been selected to shoot a free-throw at half-time of an upcoming basketball game for the chance to win $10,000. Would you spend some time practicing the shot leading up to the game, or would you simply strut in there and plan to sink the basket?

Of course, you'd practice. But sadly, many traders jump into the markets with live money, and end up losing lots of simply because they weren't prepared for the ins-and outs of actually placing trades and managing them.

Don't kid yourself, you need practice. A MAJOR part of your market education should be learning how a trade is actually placed, order types, commissions, timing your entries and exits (if you plan to trade on market timing or with a trend). All of these things take practice and refinement, and it's way to painful a lesson to learn with real money.

Practice until you've got it

If you're new to the market, we're not talking about practicing for just a couple hours, or even days. For some, it may take weeks to get a strategy and the mechanics down, while others may take months. And some will even decide they can't take the emotional stress investing your own money brings, and they decide they just need to learn enough to pick a good financial planner or investment advisor.

And even if you plan to be a long-term forex trader (yes, there is such a thing!) who infrequently places new trades or exits existing trades, you still should practice in the beginning. Placing the order wrong will cost you a spread, not to mention any loss on an erroneous trade.

Either way, if you've spent the time to go through the education we're offering here, the next step MUST be practice trading.

A word of advice: Paper trade like you mean it!

Sometimes new traders open a practice trading account, and begin placing hundreds of thousands of play money on the line, trading wildly and recklessly. That's fine if you're just looking for a good time.

But if you want valuable practice that will help you in the live market, trade just like you would if it was real money on the line. Make your practice trading account balance similar to your actual account balance. And make sure you've developed a trading strategy to test and refine.

Brazil offers to buy dollars in spot forex market

Brazil's central bank offered to buy dollars in the spot foreign exchange market on Friday, seeking to soak up a flood of greenbacks flowing into the country for an 11th straight session.

The real BRBY was trading 0.4 percent stronger at 2.03 per U.S. dollar shortly after the central bank announcement.

On May 8, the bank bought dollars for the first time in eight months as the real gained close to the psychologically key mark of two per dollar.

Forex: CBN returns to wholesale system

The Central Bank of Nigeria, on Friday, announced that it was returning the foreign exchange market to the Wholesale Dutch Auction System.

This followed the Monetary Policy committee convened to review money and foreign exchange developments in the country.

The CBN had on January 14, announced the suspension of WDAS and put in its place the Retail Dutch Auction System following an unprecedented crash in the value of naira in the foreign exchange market.

Governor, CBN, Prof. Chukwuma Soludo, who announced the return to the wholesale system, said the decision was based on the observation that exchange rates have remained stable at both the official and parallel markets for some months now.

WDAS enables the CBN to sell foreign exchange through banks while with the RDAS, companies and individuals can source their foreign exchange needs through the apex bank and their authorised dealers.

Soludo said the apex bank would remove all restrictions imposed on the market in order to attain full liberalisation in the next three months.

He said, ”The MPC observed that the medium term outlook for the forex market was stable. Consequently, the MPC decided to review the series of controls instituted in the last few months and over the next three months return to the fully liberalised regime that that we had before the recent controls.

”We believe that the premium between the parallel and official exchange rates will narrow significantly in the days ahead and we can sustain the changes over times. The CBN is also exploring the possibility of introducing futures and swaps in the foreign exchange market.”

The CBN boss added, ”As a first set of measures towards the return to WDAS, the committee decided to increase the net foreign exchange open position for banks from one to 2.5 per cent with immediate effect, while keeping in view the possibility of raising it further at the end of June 2009.

”Banks are no longer mandatorily required to sell to the CBN, after five days, funds sourced from non-RDAS and non-oil export proceeds and may use such funds for inter-bank transactions.

”Government agencies and oil companies will have the discretion to sell foreign exchange at the interbank foreign exchange market or to the CBN with effect from May 25 (Monday).”

Other policies measures taken at the MPC include the removal of the requirement that banks sell foreign exchange at one per cent around CBN rate as the apex banks will henceforth participate in the inter-bank foreign exchange market.

Soludo also announced that approvals-in-principle has been granted to 50 non-bank bureau d‘change to operate as class A BDCs. With this new status, the BDCs can now have access to official foreign exchange from the apex bank.

The apex bank also decided to issue short-term instruments to be synchronised with the Debt Management Office‘s issuance of FGN bonds in order to mop up excess liquidity in the system.