Spreads
The difference between bid and ask is called the bid-ask spread. The spreads in the Forex trading market are very small. For most currency pairs, the spread is from 2 to 4 points, which is much smaller even than spreads of the better performing, liquid securities on other markets. Spread is a hidden, “integral” cost of the forex trading, and it is minimal for the currency market. New technologies have made these low prices available to just about everybody.
Points
Point (Pip - price interest point) is the minimum price fluctuation in the cost of a currency pair. For the majority of currencies the currency rate is calculated up to a fourth of a decimal figure. Thus, 1 point is 1/10 000 or 0.0001 of the quote currency. Change in 1 point for GPB/USD at 1.7519 leads to a price of 1.7520. The point value for some currency rates, such as USD/JPY, is calculated only up to the second decimal figure (i.e. 1/100 or 0.01).
Calculation Of Profit And Loss
The majority of Forex trading platforms automatically calculate the trader’s profit and loss for open positions. This helps the trader to track profit and loss simultaneously as the market prices constantly change. However, the trader should know how such calculations are made.
Examples:
Sell 5 lots EUR/USD at price 1.4625 and buy them at price 1.4570:
In this example the client gets 55 points Ñ… 5 lots = 275 points of overall profit (as the trader sells them at a higher price than he bought them). The cost of every point for pair EUR/USD is $ 10. Thus, the final profit is 275 points x $ 10 = $ 2,750 in forex trading.
Buy 3 lots USD/JPY at price 102.10 and sell them at price 101.80:
In this example the client gets 30 points Ñ… 3 lots = 90 points of overall losses (as the client sells at a lower price than he bought them). The cost of every point for pair USD/JPY is 1000 JPY which in dollars represents 1,000: 101.80 (USD/JPY rate at the time of position closing) = about $9.82. Thus, the final loss of the client is 90 points x $9.82 = $883.80 in forex trading.
Sell 2 lots EUR/GBP at price 0.8154 and buy them at price 0.7802:
In this example the client gets 352 points Ñ… 2 lots = 704 points of overall profit. The cost of every point for pair EUR/GBP is 10 GBP which in dollars is 10 x 1.73 (let’s assume that GBP/USD rate at the time of position closing is 1.7300) = $ 17.30. Thus, the final profit is 704 points x $ 17.30 = $12,179.20 in forex trading.
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