When you want to open a position you need to place an "entry" order. If and when the entry order executes, the position becomes "open" and starts its life on the market. At one point in time, you will place an "exit" order to "close" the position. A position can be "long" (entry order is to buy and exit order is to sell an instrument) or "short" (entry order is to sell and exit order is to buy an instrument).
At the point when you place your entry order, you need to define price level at which you want to buy or sell certain instrument. You also need to specify type of the order and quantity of the instrument you want to trade. There are 3 order types:
Market Order
Placing a market order means that you will buy at your broker's current "ask" (or "offer") price, or sell at your broker's current "bid" price, whatever that price currently is. For example, suppose you are buying EUR/USD. The current market, as quoted by your broker is 1.2934 / 1.2938. This means that your broker is willing to buy EUR/USD from you at 1.2934, and sell it to you at 1.2938.
Stop Order
Initiating a trade with a stop order means that you will only open a position if the market moves in the direction you are anticipating. For example, if USD/JPY is currently 108.72 and you believe it will move higher, you could place a stop order to buy at 108.82. This means that the order will only be executed if the market moves up to 108.82. The advantage is that if you are wrong and the market moves straight down, you will not have bought (because 108.82 will never have been reached). The disadvantage is that 108.82 is clearly a less attractive rate at which to buy than 108.72. Opening a position with a stop order is usually appropriate if you wish to trade only with strong market momentum in a particular direction.
Limit Order
A limit order is an order to buy below the current price, or sell above the current price. For example, if EUR/USD is trading at 1.2952 / 56 and you believe the market will rise, you could place a limit order to buy at 1.2945. If executed, this will give you a long position in EUR/USD at 1.2945, which is 11 pips better than if you had just bought EUR/USD with a market order. The disadvantage of the limit order is that if EUR/USD moves straight up from 1.2952 / 56, your limit at 1.2945 will never be filled and you will miss out on the profit opportunity even though your view on the direction of EUR/USD was correct. Opening a position with a limit order is usually appropriate if you believe that the market will remain in a range before moving in your anticipated direction, allowing the order to be filled first.
For both entry and exits orders you can specify price levels at which you want them to be executed. You have to specify entry levels when you place you entry order, while most brokers would allow you to specify exit levels at any time.
At the point when you place your entry order, you need to define price level at which you want to buy or sell certain instrument. You also need to specify type of the order and quantity of the instrument you want to trade. There are 3 order types:
Market Order
Placing a market order means that you will buy at your broker's current "ask" (or "offer") price, or sell at your broker's current "bid" price, whatever that price currently is. For example, suppose you are buying EUR/USD. The current market, as quoted by your broker is 1.2934 / 1.2938. This means that your broker is willing to buy EUR/USD from you at 1.2934, and sell it to you at 1.2938.
Stop Order
Initiating a trade with a stop order means that you will only open a position if the market moves in the direction you are anticipating. For example, if USD/JPY is currently 108.72 and you believe it will move higher, you could place a stop order to buy at 108.82. This means that the order will only be executed if the market moves up to 108.82. The advantage is that if you are wrong and the market moves straight down, you will not have bought (because 108.82 will never have been reached). The disadvantage is that 108.82 is clearly a less attractive rate at which to buy than 108.72. Opening a position with a stop order is usually appropriate if you wish to trade only with strong market momentum in a particular direction.
Limit Order
A limit order is an order to buy below the current price, or sell above the current price. For example, if EUR/USD is trading at 1.2952 / 56 and you believe the market will rise, you could place a limit order to buy at 1.2945. If executed, this will give you a long position in EUR/USD at 1.2945, which is 11 pips better than if you had just bought EUR/USD with a market order. The disadvantage of the limit order is that if EUR/USD moves straight up from 1.2952 / 56, your limit at 1.2945 will never be filled and you will miss out on the profit opportunity even though your view on the direction of EUR/USD was correct. Opening a position with a limit order is usually appropriate if you believe that the market will remain in a range before moving in your anticipated direction, allowing the order to be filled first.
For both entry and exits orders you can specify price levels at which you want them to be executed. You have to specify entry levels when you place you entry order, while most brokers would allow you to specify exit levels at any time.
Calculating Profit
The objective of forex currency trading is to exchange one currency for another in the expectation that the market rate or price will change so that the currency you bought has increased its value relative to the one you sold. If you have bought a currency and the price appreciates in value, then you must sell the currency back in order to lock in the profit.
Let us assume that you open a long position by buying USD/JPY for 107.58 (quantity of 100000) and few hours after that, you close the position by selling USD/JPY for 107.74 (quantity of 100000). These two trades would bring you profit of (107.74 - 107.58) * 100000 = JPY 16000 (JPY is the counter or quote currency in the USD/JPY pair). You can than convert the profit to a currency you like, for example JPY 16000 = 16000 / 107.74 = USD 148.51.
We can also say that these two trades would bring you 16 "pips" profit. A "pip" is the smallest increment in any instrument. For asset types other than forex, the smallest increment is often called "tick". In EUR/USD one pip is 0.0001, in USD/JPY one pip is 0.01. Expressing position profits in pips is often very useful for quick calculations and estimates.
One pip, from the example above, would bring you 0.01 * 100000 = JPY 1000 profit, or JPY 1000 = 1000 / 107.74 = USD 9.28.
The objective of forex currency trading is to exchange one currency for another in the expectation that the market rate or price will change so that the currency you bought has increased its value relative to the one you sold. If you have bought a currency and the price appreciates in value, then you must sell the currency back in order to lock in the profit.
Let us assume that you open a long position by buying USD/JPY for 107.58 (quantity of 100000) and few hours after that, you close the position by selling USD/JPY for 107.74 (quantity of 100000). These two trades would bring you profit of (107.74 - 107.58) * 100000 = JPY 16000 (JPY is the counter or quote currency in the USD/JPY pair). You can than convert the profit to a currency you like, for example JPY 16000 = 16000 / 107.74 = USD 148.51.
We can also say that these two trades would bring you 16 "pips" profit. A "pip" is the smallest increment in any instrument. For asset types other than forex, the smallest increment is often called "tick". In EUR/USD one pip is 0.0001, in USD/JPY one pip is 0.01. Expressing position profits in pips is often very useful for quick calculations and estimates.
One pip, from the example above, would bring you 0.01 * 100000 = JPY 1000 profit, or JPY 1000 = 1000 / 107.74 = USD 9.28.
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