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Who makes profit in Forex?

November 23, 2013 at 8:23 pm

Let’s cover the basics.

During trading hours each currency pair at any given moment has two prices: Bid and Ask. The Bid is the price at which you can sell and the Ask is the price at which you can buy.

For example, the EURUSD pair might be quoted as 1.3501-1.3503 meaning that you can but it at 1.3503 and sell it at 1.3501. The difference between these prices is called spread. In this particular example the spread is 2 pips.

Why is there a spread? 

The spread is the commission charged by your broker for their services. So, the first profit is made by your broker once you open a trade. Well, the last profit is also made by your broker when you close your trade 🙂 It’s not that there anything wrong with it considering that your broker takes risks and provides you access to the market.

The size of the spread fluctuates during the day. It increases during volatile times when prices move fast and decreases in quiet markets. The average spread sizes also vary between different currencies and brokers, of course. The spread is your expense and it becomes a consideration once you look at different currency pairs. In some exotic currency pairs spreads can reach 15-20 pips.

Remember that spread is your expense! As soon as you open a position, your account is down for the size of the spread. The more transactions you do, the more spreads you have to pay. Therefore, the spread size should be one of considerations when you choose currency pairs to trade.

So, where is your profit?

As you probably already know, your profit lies in the difference in prices. If there is a good probability that the currency’s price is going to increase, you buy that currency. If the price does increase, you sell that currency and pocket the difference in price minus the spreads.

If you believe that the price of the currency is going to fall, you sell that currency. If your guess was correct, you purchase that currency at some later time and pocket the price difference minus the spreads.

The price difference then is multiplied by the lot size and becomes your profit equivalent in dollars. So if, for example, you bought one mini-lot of EURUSD at 1.3503 and sold it at 1.3553 you made 50 pips, which for one mini-lot translates to approximately $50 of profit.

In forex it is just as easy to sell as to buy. All you have to do is place a buy order when you believe that the price will increase (go long) or place an order to sell when you believe that the price is going to decrease (to short).

How do I trade forex in my spare time?

November 23, 2013 at 4:05 pm
For me, the spare time trading is exactly what it sounds like. All my trades are based on simple technical analysis except for trading on news.

The process is pretty simple. The most activity in forex trading starts around 8:00 – 8:30 am EST when North American markets open. Therefore, on weekdays I start my day around 6:30-7am by making myself a cup of coffee and checking news and the schedule of forex related news events for that day. Then, I visually scan through the list of currency pairs looking for possible trade setups.
Once I see a setup I like, I calculate where my stop loss order will be and what would be my first two profit targets. If the risk/reward ratio is acceptable, I place stop buy/sell orders with my broker and leave them there until they are filled or until the setup changes. I also compile my watch list by jotting down currency pairs that are in the process of forming some kind of a setup. All these tasks usually take around one hour of my time.
During the day, depending on the currently traded time frame, every once in a while I check my open orders to see whether the stops need adjustments. These checks take less than a minute each.
In the evening, I check my open orders, if any, check my watch list and scan through the rest of the charts to see whether there are any new developments. This whole process takes around 30-60 minutes.
During the course of the evening and before going to bed, I might also spend a few minutes to check on the charts in my watch list.

Why to trade Forex?

November 22, 2013 at 11:17 pm
Whether to trade or not to trade is a strictly personal decision. But for those that do want to trade there are the following advantages in Forex:

1. The 24-hours operation during weekdays make it perfect for part-time trading.
     The forex opens at 5 pm EST on Sunday and stays open until 5 pm EST on Friday.

2. Liquidity.
    Forex is the biggest and the most liquid market of all, especially when trading the most popular currency pairs.

3. Small starting capital requirements.
    There is no need to come up with large amounts of money in order to start trading forex. One can start with as little as $100. Once you become consistently profitable, you can increase your lot size. 

Yes, it is possible to trade imaginary money in a virtual account for free. But the problem with that is that psychological  pressures of trading real money makes the trading way too different. This is not to mention order execution problems encountered in real life.

What is FOREX and how does it work?

November 22, 2013 at 9:16 pm
FOREX stands for Foreign Exchange. Unlike stocks and commodities markets, foreign exchange is completely decentralized. There are no formal exchanges where transactions take place. Practically all forex trading is “over-the-counter” and transactions are done over the phone, with a broker, or by electronic means. Therefore, forex is rather a general term combining all worldwide financial institutions and organizations of all calibers into a single market place.
Just think about it. Every time two people or businesses located in different countries make a transaction, they have to exchange their local currency into the currency of another country. Now imagine how many such transactions take places each and every day around the world. Add to that huge volumes of currencies exchanged for speculation and investments by banks and other financial institutions and you will see why this is the biggest market of all.
For an average person, the most practical way to trade forex is via an online broker. Brokers pair all buy and sell orders and re-sell  or hedge the remaining part to other brokers and/or financial institutions. The prices quoted by the broker are usually aggregated from multiple sources and might differ very slightly from one broker to another.
All currencies are traded in pairs. Each pair’s name is an abbreviation of the names of its currencies. Some of the pairs were given nicknames by traders. There are many different pairs but the main trading activity is concentrated in the following:
EUR/USD   –  Euro versus US dollar or the number of US dollars for one Euro (euro, fiber)
GBP/USD   –  British Pound versus US dollar or the number of US dollars for one British pound
                        sterling (pound, sterling, cable)
USD/JPY    –  US dollar versus Japanese yen or the number of Japanese yen for one US dollar (yen,
                        dollar-yen, ninja)
USD/CHF   –  US dollar versus Swiss franc or the number of Swiss francs for one US dollar (swissie,
                        dollar-franc). CHF stands for Confederation Helvetia franc.
USD/CAD  –  US dollar versus Canadian dollar or the number of Canadian dollars for one US dollar
                       (Loonie, Canuck)
AUD/USD  –  Australian dollar versus US dollar or the number of US dollars for one Australian dollar
                        (Oz or Aussie)
NZD/USD  –  New Zealand dollar versus US dollar or the number of US dollars for one New Zealand
                        dollar (kiwi)

There are also pairs called crosses such as:

EUR/JPY    –  Euro versus Japanese yen or the number of Japanese yen for one euro (yuppi)
EUR/GBP   –  Euro versus British pound  or the number of British pounds sterling for one euro (euro-
                        pound, euro-sterling)
EUR/CHF   –  Euro versus Swiss franc or the number of Swiss francs for one euro (euro-swissie)

The list goes on.

The price of the pair states how much the first currency is worth in the second currency denomination. For example, if the price for EUR/USD is 1.3500, this means that one Euro is currently worth $1.35.
You are always long or short one side of the pair against the other side of that pair. When you buy the EUR/USD pair this means that you simultaneously buy the Euro and sell the USD. When you short the Euro, you basically sell the Euro and buy the USD.
All currency pairs in retail forex are traded in lots. Each standard lot is worth $100,000 USD of whatever currency is being traded. Therefore, when trading the Canadian dollar, the Euro, or any other currency, you would be trading $100,000 USD worth of that currency. The actual amount of that currency will depend on its current price in USD.
There are also mini and micro lots, which are one tenth and one hundredth of the size of the regular lot respectively.

End of week results. Let’s call it a week and go flat into the weekend.

November 22, 2013 at 1:54 pm

The news did not affect the USDCAD price much. No more trading for me today. All orders closed including the remaining position in USDCAD.

The total profit since yesterday morning is: EURUSD 84 pips + USDCAD 147 pips = 231 pips

Have a nice weekend!

Nov. 22 morning

November 22, 2013 at 1:29 pm

Today is Friday, which is a short day of trading before the weekend. I don’t see any good setups this morning and therefore will be to playing it safe.

   Closed the open position @ 1.3518 for a round profit of 40 pips.

    Speculative Buy on news @ 1.0571 for a very short-term trade. No SL as I will be watching it closely.

Nov. 21 night results.

November 22, 2013 at 12:56 pm

Good morning! Yes, it’s good indeed. While I was sleeping both my long positions went up, so I adjusted the stops accordingly:

   Moved trailing stop higher to 1.0528 (current unrealized profit for this position is 59 pips)

Although it looks like the USDCAD price is due for correction, I am willing to give this position more leeway as Statistics Canada will be releasing Core CPI and Core Retail Sales numbers this morning at 8:30am, which might thrust the price further up.

   P1 and P2 were reached for a total profit of 44 pips. Just love it when the money is made while I sleep.
  1 position is still open with SL @1.3507 (current unrealized profit is 29 pips)

What is a PIP?

November 22, 2013 at 12:15 am
In retail FOREX, PIP or Percentage in Point is the smallest normal unit of change (the smallest normal increment) for a currency pair. In other words it is normally the smallest change in price of the currency. Nowadays many FOREX brokers quote prices in tenths of a pip, so they would quote the price of the USDCAD pair as 1.04712,for example.The easiest way to calculate a pip is to ignore the decimal point and to count the fifth digit starting from the left. Therefore, for the majority of currency pairs one pip equals to 0.0001. The exception to this rule is Japanese yen under 100.00. In that case the pip is the fourth digit from the far left or 00.01

So, when I bought the USDCAD pair for 1.0471and the price went up to 1.0495, I made 1.0495 – 1.0471 = 0.0024 or 24 pips.

All currency pairs in retail forex are traded in lots. Each standard lot is worth $100,000 USD of whatever currency is being traded. Therefore, when trading the Canadian dollar, the Euro, or any other currency, you would be trading $100,000 USD worth of that currency. The actual amount of that currency will depend on its current price in USD.

To simplify calculations, one can assume that the standard lot size is 100,000 units. Therefore, for a standard lot, a 1 pip change in price represents a change in 10 units or roughly close to $10. When trading 0.1 lot size (mini lots), one pip would be roughly equal to $1.

For novice traders and people with relatively small starting capital it would make sense to start trading in 0.01 lot sizes (also called micro lots), where each pip would be roughly equal to $0.10

Nov. 21 end of day results

November 21, 2013 at 11:15 pm

2 positions reached their profit targets for a total profit of 68 pips.
1 position is still open with trailing SL currently @ 1.0509 (in the money)

3 positions still open  @1.3478, current SL @1.3458

November 21, 2013 at 4:45 pm

Each trade in each currency will be based on opening 3 positions (3 units) with 2 positions having profit targets (P1 and P2) and the third position exit will be based on a trailing stop (for those who don’t know what trailing stop is I will explain later).

Once the P1 target is filled, the stop loss (SL) orders for the remaining 2 positions will be adjusted. If there is a logic level close to the break even point, I prefer to move these SL orders to break even points  but that’s not always the case.

Nov. 21, 2013
Buy 1.3478, Stop Loss (SL): 1.3443
   P1: 1.3492
   P2: 1.3508