Whether you’re a power trader or a financial newbie, you’re likely to hear just about anything— market movements, outlooks and stocks—being described as bullish or bearish.
Traditionally, bull markets offer traders an opportunity to enter a trade by buying a financial product at a low rate and closing the trade for a profit by selling it at a higher rate. Conversely, bear markets offer the opportunity to enter a trade by selling at a high rate to close the trade by buying at a lower rate. Although, many financial products have restrictions on selling to capitalize on bear market opportunities. However, forex does not have these restrictions.
|A BULLISH TRADER|
|A BEARISH TRADER|
In the Forex market
The value of a currency in relation to another is constantly in flux. One currency is always strengthening against another (bullish), and therefore, one currency is always weakening against another (bearish). Because of this, you have equal opportunity to buy or sell to enter the market.
You may not realize it, but the bulls and bears aren’t at odds. In fact, they represent two trading opportunities in the forex market.
What is forex trading?
In forex trading, traders hope to generate a profit by speculating on the value of one currency compared to another. This is why currencies are always traded in pairs—the value of one unit of currency doesn’t change unless it’s compared to another currency.
Currency pairs appear like this:
Euro is the first currency listed is the base currency.
U.S. Dollar is the second currency called the quote or terms currency
A sample quote for this pairs could be:
The base currency is always worth one. The quoted price shows how much of the quote currency you’ll get for one unit of the base currency. So in this case, 1 EUR is worth approximately 1.33 USD.
Two trade opportunities
The buy or sell action you take to enter a trade always applies to the base currency. The opposite action automatically applies to the quote currency. So, if you buy the EUR/USD, this means you’re buying euros and selling US dollars. If you sell the EUR/USD, you’re selling euros and buying US dollars.
Scenario 1: BUY TRADE
If you believe the current value of the euro is strengthening against the US dollar, you might enter a trade to buy euros in the hopes that the currency’s value will become stronger compared to the US dollar. In this scenario, the euro is bullish and the US dollar is bearish.
Scenario 2: SELL TRADE
Conversely, if you think the current value of the euro will weaken against the US dollar, you might enter a trade to sell euros in the hopes that the currency’s value will become weaker compared to the US dollar. In this scenario, the euro is bearish and the US dollar is bullish.
DID YOU KNOW?
Even if you’re new to Forex, you may have traded currencies before.
When you exchange currencies while travelling in a foreign country, you are technically selling your currency and buying that of the country you are visiting. At that time, you probably realized that one unit of your currency was not exactly equal to one unit of the other country’s currency: its value was either more or less.
Selling US Dollars and buying Japanese Yen
Exchange Rate Difference
$1 = ¥102
Exchanging currencies isn’t just for travelers, The price difference is something you can trade.
In the global economy, there are many business transactions that require organizations to convert /exchange the value of one currency to another in order to pay the bill. In every exchange, prices need to be adjusted because one currency is typically weaker (has less value) while the other is stronger (has more value).
With so many changes taking place, currency values are rarely static.
The value of one currency compared to another can change in response to political news, economics and interest rate changes. A currency that was weaker than another in the morning may be stronger by the afternoon.
The Forex market is BIG.
While the worldwide bond and stock markets have a daily volume in billions of dollars, this can lead to more trading opportunities.
Who trades Forex?
The financial community, from big banks and hedge funds to small and medium-sized traders, understands the wide range of opportunities in the forex market. And since the markets are open longer than traditional markets, you can trade when it’s convenient for you.
What currencies can I trade?
You can trade almost any currency—depending on which currency pairs your dealer offers. As a new trader, however, you will probably make your first trade with eight of the most commonly traded currencies in the world.
What is PIP?
In forex, currency pairs display their prices with four decimal points. Such as those that involve the Japanese yen, display two decimal places. No matter what currency pair you’re trading, the last large number behind the decimal always represents a pip, the main unit price that can change for the currency pair. As you trade, you’ll track your profits (or losses) in pips. One unit of movement represents one pip. That may seem small and you may be wondering how forex can be worthwhile if all you’re speculating on is a small fraction of a currency. Since forex is traded in large volumes, called lots, these fractions can add up very quickly. In short, the higher volume you trade the more each pip will be valued.
EUR/USD Price example :
Represents one pip
What is a LOT?
In forex, a lot is a standard unit of measurement. At most forex dealers, one standard lot usually equals 100,000 units of currency. As forex is leveraged, you are able to trade in intervals of 1,000 units but not required to invest $1,000. Whenever you place a trade, you start with your desired volume. Let’s say 10,000 for this next example.
|1 LOT = 100,000|
|WORTH OF CURRENCY|
What is LEVERAGE?
One of the benefits of this market is the ability to trade on leverage. You don’t need $10,000 in your account to trade the EUR/USD. Currency pairs can have a leverage ratio of up to 50:1. This means you can control a large position ($10,000) with a small amount of money ($250). Nonetheless, please remember that products that are traded on margin carry a risk that you can lose more than your initial deposit.
currency paris can have a Leverage Ratio of up to 400 : 1
So how do PIPS, LOTS AND LEVERAGE work together
For example :
You just bought 100,000 EUR/USD on 50:1 leverage.
You purchased at 1.30000 then closed the trade by selling at 1.30200. This means you’ve earned 20 pips.
Calculating your earning
0.0001 (1 LOT) X US $100,000 = US$10 per PIP
US$10 x 20PIP = US$200
For your 20-pip trade, you would have earned US$200.
Not all of the pips you’ll earn US$10. The value of a pip depends on the lot size of your trade, how many lots you’re trading, the currency pair and your account currency.
While you can manually calculate this or use online pip calculators to learn the value of a pip before you trade, most trading applications automatically calculate pip values and convert them to the currency you’re trading.