Posts Tagged ‘Bid Price’

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Forex Profits and Losses – Calculating Them Properly

December 21st, 2009

Just about any online Forex broker you pick will have a trading platform available to automatically calculate your profit and loss. However, it’s important to understand the basic math that goes into this. That’s a good way to make certain that your broker is honest, and it’s a good skill to have. Calculating profit and loss is fairly simple. There are only two simple formulas to keep track of.


When the quote currency is USD (the second part of a currency pair), the formula you’ll need is: Profit = Price Change in Pips X Units Traded. If USD is the base currency (the first part of the currency pair), the right formula is: Profit = Price Change in Pips X Units Traded / Exit Price. Here are a few examples to help you better your understanding.


If the quote currency is USD, assuming that the broker requires a one percent margin, you’ll be able to trade a hundred thousand dollars for only a thousand. If you’re planning to trade EUR/USD (currently trading are about 1.2518/9), and you predict that the euro is going to rise in value against the dollar, you’ll execute a trade to buy euros, selling USD at the same time. If you’re buying, you’ll have to take the asking price (the second number in the quote).


If your calculations are correct, and the price rises, you then initiate a trade to sell your euros and buy US dollars. At this time, you’ll use the bid price, say: 1.2532. Since you were able to buy at 1.2519 and sell at 1.2532, you had a profit of seventeen pips, expressed as 0.0017. To convert that into real money, use the formula listed above: Profit = Price Change in Pips X Units Traded, or Profit = 0.0017 X 100,000 = $170.00


One easy rule to keep in mind is that when you’re trading a standard sized lot of a currency pair (like 100,000) in which USD is the quote currency, a pip is always ten dollars. That means that seventeen pips equals a hundred and seventy dollars.


Now, we’ll take a look at an example where the base currency is USD instead. When we decide to buy a hundred thousand units of USD/JPY at 117.22, and our calculations are correct, the price rises, and we’re able to sell at 117.35. This earns us thirteen pips.


To calculate our profit, make use of the second formula: Profit = Price Change in Pips X Units Traded / Exit Price, or Profit = .13 X 100,000 / 117.35 = $110.78. It’s really very simple.

Ian Armstrong is an avid Forex enthusiast.

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Metatrader Overview. Break Even

December 21st, 2009

Break Even is a special case of Trailing Stop. The difference is that the Stop Loss value is set only once when the required level is reached and it does not change any more till the order is closed. Break Even allows to fix Stop Loss value at the break-even point. To make a newly opened order reach the break-even point, it has to surmount the spread which is a distance between purchase price and selling price. After this, the Stop Loss value needs to be fixed in this point. In this manner, if the price turns in the opposite direction then the order is closed with zero losses.

Break Even point can be fixed using automatic Stop Loss. This is the most reliable method, however if broker configurations do not allow fixing this value so close to the current price then the closing can be done manually.

You can also combine manual Stop Loss and automatic one in the logic of Break Even. I.e., to close the order at the break-even point in any case, but to set the automatic Stop Loss if possible. 

Let’s look at example with manual Stop Loss value. Break Even=BE=5 pips. This means that the Stop Loss value will be set 5 pips higher than the break-even point. Current Bid price =1.4038, Ask=1.4040. We set a BUY order. We have the following characteristics of the opened order: opening price is 1.4040. Current profit is 2 pips. Closing point as per algorithm is set at the level of 1.4045, however we have to remember that the algorithm will start operate only when the price will surmount this level.

The price got up by 10 pips. Current values of the order: opening price is 1.4040, Ask=1.4050, current profit is 8 pips. Condition for triggering of the Break even algorithm is satisfied. Now, when the price will move in the opposite direction and will pass the BE level=1.4045, the order will be closed.

The price lowered by 8 pips. Current values of the order: opening price is 1.4040, Ask=1.4042, current profit is 0 pips. Condition for triggering of the Break even algorithm was satisfied earlier. Order is closed as the price surmounted the BE level in the opposite direction. In this example, we see difference between conventional and automatic method of order closing. In automatic mode (Stop Loss=1.4045), the order was closed with 5 pips of profit. In our case the order is closed with zero profit level, because the closing method was manual.

In fact, Break Even is a special case of Stop Loss, but individual term is used for convenience. Take Profit and Break Even can be combined in practice of Expert advisors’ development.

Alexey Koshevoy, AirBionicFX founder and CEO

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Metatrader Overview. Stop Loss

December 20th, 2009

Standard Stop Loss

Stop Loss have to be divided into two types, same as Take Profit. The first type is automatic, the second is manual. The main function of Stop Loss is to minimize losses when the price rushes in direction that is opposite to the desirable.

Let’s first look at the automatic Stop Loss. It is activated as follows: an order is opened and value of Stop Loss is being set as an absolute value lower than opening price. In case if the Stop Loss level is reached, the order is closed automatically.

Let us look at an example.

Ask price=1.4040, Bid=1.4038. We open a BUY order. Opening price is 1.4040. Let’s set Stop Loss=1.4020. Price ticks down and passes the level Bid=1.4020. The order is closed automatically. The loss is 20 pips.

The similar situation for SELL order

Ask price=1.4040, Bid=1.4038. We open a BUY order. Opening price is 1.4038. Let’s set Stop Loss=1.4063. Price goes upward and passes the level Ask=1.4063. The order is closed automatically. The loss is 20 pips.

One of the features of Stop Loss is that it cannot be set too close to the order opening price. Minimal distance can be different and is being set according to configurations of the broker server. Value is counted from the opening price. I.e. from the Ask price for BUY orders and from the Bid price for SELL orders.
During the time when the order is open, we are able to change the Stop Loss value. Herein, rules for distance of a new Stop Loss value are exactly the same as during the order opening. The only difference will be that current price value has to be used but not the order opening price.

For convenience, the traders use relative values of Stop Loss in the pips, e.g., for the value of SL=25 at current price of Bid=1.4038 and Ask=1.4040, absolute value of Stop Loss for BUY order will be 1.4015, and for SELL order under the same conditions it will be 1.4063. I.e., Ask price is taken as a basis for the BUY order and Bid price is taken for the SELL order. In this manner, when closing an order on Stop Loss event we will receive precisely 25 pips of loss.

Manual Stop Loss.

Manual method of order closing differs from the automatic one in the way that in case of reaching Stop Loss level, the order is not closed automatically, and it has to be closed manually. Such method is not very effective because additional efforts are required, but there are cases when it is reasonable to use particularly manual closing. E.g., when we need to use a function of partial closure of an order under different levels of loss for one and the same order.

Let’s take a look at an example. We open an order with 3 lots volume. And we will close one lot at a different level of loss. SL1=10, SL2=20, SL3=30. When reaching SL1 and SL2, parts of the order will be closed manually and closing of the part at the SL3 level will be done automatically.

In this manner, with the Bid price =1.4038, Ask=1.4040, the parameters:

For BUY order will be as follows: open price=1.4040, manual Stop Loss SL1=1.4030, manual Stop Loss=SL2=1.4020, standard Stop Loss=SL3=1.4010.

For SELL: open price=1.4008, manual Stop Loss SL1=1.4018, manual Stop Loss=SL2=1.4028, standard Stop Loss=SL3=1.4038.

Manual method of order closing as per the Stop Loss level has one disadvantage minimum. If a technical deficiency suddenly occurs on the trader side, then it would be impossible to close the order timely at least. In automatic method, order will close in any case regardless of technical state of the metatrader terminal. Thus, trader is responsible for manual order closing, and broker is responsible for the automatic closing. These peculiarities have to be obligatory taken into account when choosing parameters for the order being opened.

Alexey Koshevoy, AirBionicFX founder and CEO

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Metatrader Overview. Take Profit

December 20th, 2009

Standard Take Profit

Two types of Take Profit have to be distinguished. The first type is automatic, the second is or manual.

Let’s look at the automatic Take Profit. It is activated as follows: an order is opened and value of Take Profit is being set as an absolute value higher than opening price. In case if the Take Profit level is reached, the order is closed automatically.
Let us look at an example.

Ask price=1.4040, Bid=1.4038. We open a BUY order. Open price is 1.4040. Let’s set the Take Profit value=1.4060. The price starts to move up and reaches Ask value=1.4060, but the order is not closed as the BUY order will be closed as per the Bid level. The price keeps on going up and passes the Bid level=1.4060. The order is closed automatically. The profit is 20 pips.

The similar for SELL order. Ask price=1.4040, Bid=1.4038. We open a SELL order. Open price is 1.4038. Let’s set the Take Profit value=1.4018. Price is going down and passes the Ask level=1.4018. The order is closed automatically. The profit is 20 pips.

One of the features of Take Profit is that it cannot be set too close to the order opening price. Minimal distance can be different and is being set according to configurations of the broker server. Value is counted from the closing price. I.e. from the Bid price for BUY orders and from the Ask price for SELL orders.
During the time when the order is open, we are able to change the Take Profit value. Herein, rules for distance of a new Take Profit value are exactly the same as during the order opening. The only difference will be that current price value has to be used but not the order open price.

For convenience, the traders use relative values of Take Profit in the pips, e.g., for the value of TP=25 at current price of Bid=1.4038 and Ask=1.4040, absolute value of Take Profit for BUY order will be 1.4065, and for SELL order under the same conditions it will be – 1.4013. I.e., Ask price is taken as a basis for the BUY order and Bid price is taken for the SELL order. In this manner, when closing an order on Take Profit event we will receive precisely 25 pips of profit.

Manual Take Profit.

Manual method of order closing differs from the automatic one in the way that in case of reaching Take Profit level, the order is not closed automatically, and it has to be closed manually. Such method is not very effective because additional efforts are required, but there are cases when it is reasonable to use particularly manual closing. E.g. when we need to use a function of partial closure of an order under different levels of profit for one and the same order.

Let’s take a look at an example. We open an order with 3 lots volume. And we will close one lot at a different level of profit. TP1=10, TP2=20, TP3=30. When reaching TP1 and TP2 parts of the order will be closed manually and closing of the part at the TP3 level will be done automatically. 

With the Ask=1.4040, Bid price =1.4038 the parameters for BUY order will be as follows: open price=1.4040, manual Take Profit TP1=1.4050, manual Take Profit =TP2=1.4060, standard Take Profit=TP3=1.4070.

With the Ask=1.4070, Bid price =1.4068 the parameters for SELL order will be as follows: open price=1.4068, manual Take Profit TP1=1.4058, manual Take Profit =TP2=1.4048, standard Take Profit=TP3=1.4038.

Manual method of order closing as per the Take Profit level has one disadvantage minimum. If a technical deficiency suddenly occurs on the trader side, then it would be impossible to close the order timely at least. In automatic method, order will close in any case regardless of technical state of the metatrader terminal. Thus, trader is responsible for manual order closing, and broker is responsible for the automatic closing. These peculiarities have to be obligatory taken into account when choosing parameters for the order being opened.

Alexey Koshevoy, AirBionicFX founder and CEO

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Forex Trading Tools: Common Forex Trading Terms

October 29th, 2009

The foreign exchange market, or Forex market, is an around-the-clock cash market where the currencies of nations are bought and sold. Forex trading is always done in currency pairs. For example, you buy Euros, paying with U.S. Dollars, or you sell Canadian Dollars for Japanese Yen. The value of your Forex investment increases or decreases because of changes in the currency exchange rate or Forex rate. These changes can occur at any time, and often result from economic and political events. The purpose of this article is to discuss commonly used Forex trading terms.


Bid and Ask Price: Like the stock market, the Forex market has a bid and ask price. The bid is the price you can sell at. The ask is the price you can buy at.


Bid/Ask Spread: The bid/ask spread or simply spread is the distance between the bid and ask prices. This spread is usually expressed in pips. For example, if the the bid price is 1.2362 and the ask price is 1.2365, the spread between the bid and ask prices is 3 pips wide (1.2365 – 1.2362 = 3 pips).


Lots: 1 Lot is equal to 100,000 units of the base. Likewise, 2 Lots are equal to 200,000 units of the base, 3 Lots are equal to 300,000 units of the base, and so on.


Margin: Margin is referred to as the collateral needed to facilitate a Forex deal. Usually, this is a very small portion of the entire deal, say 1% or 1:100. Please note that margin is a double-edged sword. Without the proper use of risk management tools (for example, the stop-loss option), you can experience substantial losses as well as gains.


Long Position/Short Position: A long position is a market position that appreciates in value if the market price increases. Conversely, a short position is a market position that appreciates in value if the market price decreases. (In every open Forex position, you are long in one currency and short in the other.)


Stop-Loss Order: A stop-loss order is a market order to close a Forex position if or when losses reach a pre-set threshold. According to Bruce Kovner: Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I am getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis. Ed Seykota adds: The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.


Take-Profit Order: A take-profit order is a market order to close a Forex position if or when profits reach a pre-set threshold.


Fundamental Analysis: A fundamental analysis uses economic and political factors, such as unemployment rates, interest rates, or inflation, as a means of predicting currency movements. Fundamental analysis is concerned with the reasons or causes for currency movements. Many Forex traders who rely on fundamental analysis plan their trading strategies around a number of key U.S. Government economic indicators. Some of these indicators are the Gross Domestic Product (GDP), Foreign Exchange Rates, the Composite Index of Leading Indicators, the Consumer Price Index (CPI), Retail Sales, Housing Starts, the Employment Cost Index, and Consumer Confidence.


Technical Analysis: A technical analysis uses historical data as a means of predicting currency movements. The technical analyst believes that history repeats itself over and over again. Technical analysis is not concerned with the reasons for currency movements (for example, interest rates or inflation). Instead, it believes that historical currency movements are a clear indication of future ones.


Trading System: According to Howard Abell, The trading system gives the trader the ability to control his or her emotional states rather than allowing them to control him. A system is a disciplined method for organizing dynamic, ever-changing market phenomena.


Trading Forex on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite.

Gregory DeVictor is a consultant who has been developing and marketing web sites since 1999. You can avoid the mistakes that 90% of Forex traders make and become part of the select 10% group of successful Forex traders. Learn more at: http://www.forex-trading-system.name

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