Minimal change of the exchange rate is called the point. For currency pairs without the Japanese yen the point is 0.0001, for pairs with yen is 0.01. That is, if the EURUSD rate went from 1.2631 to 1.2682, then we say that the EURUSD rose by 51 points. If the USDJPY exchange rate changed from 85.28 to 84.18, the pair USDJPY fell by 110 points
Money can be bought and sold like any other commodity. But as a commodity (currency) in the online trading is, in fact, virtual, the traditional concepts of sale do not apply to it. It uses other terms: Buy – open a buy order, open a long position, enter a long position, enter Long, bull. Sell – open an order for sale, open a short position, enter a short position, enter in shorts, “shorted”, bear. However, to say “buy” or “sell” in the community of traders is not an error, and no one would not shower stones on you.
Profit-taking at the open position is accomplished by closing the order.
The purchase price in the currency market is called Ask, the sale price – Bid. Ask always different from Bid. Both prices are indicated in currency quotations as follows: EURUSD = 1.2631 / 33, that is, for a given pair Bid = 1.2631, Ask = 1.2633. Often beginners are confused with these prices when opening and closing orders. Therefore, I want to clarify right now:
A buy order opening is always done at an Ask price, and its closing at a Bid price. Opening of the order for sale comes at a Bid price, and closing it at an Ask price.
The difference between the Bid price and the Ask price is called Spread. Its size depends on the currency pair, its volatility, a dealing center through the medium of which you trade. Often spread for major pairs hovers around 2-5 points.
In addition to the opening price, the order also has a volume which is measured in lots. Lot is 100,000 units of base currency. That is, for the GBPUSD pair at the Bid price = 1.5713 a lot will cost: 100,000 x 1.5713 = 157,130 USD. Therefore, if you trade using a leverage of 1: 100, you will need a deposit (margin) in the amount of $ 157,130 / 100 = $ 1571.30 to enter into a short position. Such amount is unaffordable for most beginning traders. Therefore, now 1/10 and 1/100 shares of lots are widespread in trading. In the last case only $ 15.71 will need to open a sell order.
It seems, we gained insight into terms. Now we may go to the main: calculation of profitability. So to speak, this information is needed to you for the overall intelligence development. You hardly ever do will count the cost of a point, as it will made it for you by a trading terminal, or an application by means of which trading is carried out. However, you should know the basics in order not to ask stupid questions on forums in the future.
First, let’s learn how to calculate the value of one currency rate point. For pairs with a direct quote it is as follows:
CONTRACT VALUE x POINT = POINT VALUE
The contract value for all currency pairs with direct quote is the same and equal to 100,000 b. u. (base units). The size of the point is also constant – 0.0001. Therefore, the point value will be equal to 100,000 x 0.0001 = $ 10.
For currency pairs with indirect quote the formula for calculating the point value has a slightly different form:
CONTRACT VALUE x POINT / EXCHANGE RATE = POINT VALUE
To select properly a spot rate necessary in the case, you must use the following rule:
Spot rate is selected according to the quoted currency of the cross-rate which point value is calculated for.
For example: for EURGBP this is GBPUSD, for CHFJPY – USDJPY, for EURCHF – USDCHF.
Cross-rate – AUDCAD, spot rate of USDCAD is 1.0015 => 100,000 x 0.0001 / 1.0015 = $ 9.99
Cross-rate – CHFJPY, spot rate of USDJPY is 83,19 => 100,000 x 0.01 / 83.19 = $ 12.02
Knowing the value of one point for opening a position of 1 lot, we can derive a general formula for calculating the profitability of trading operations carried out on any currency pair:
PROFIT = (ASK PRICE – BID PRICE) / POINT SIZE x POINT VALUE x VOLUME,
ASK PRICE – the price of opening a short position or closing a long one;
BID PRICE – the price of opening a long position or closing a short one;
POINT SIZE – 0.0001 or 0.01 for pairs with yen; POINT VALUE – the actual cost of 1 point of the traded currency pair;
VOLUME – volume of the opened position in lots.
Let me give a pair of examples.
Example 1. Suppose that you predict an increase of EURUSD quotes throughout a day. In the morning, at the moment of opening a position with volume of 0.58 lot, the pair exchange rate was 1.2491 / 92. In the evening, when you closed the order, the rate amounted to 1.2584 / 85. As seen, the pair cost has grown, and you get some profit with the open order, namely:
PROFIT = (1.2584 – 1.2492) / 0.0001 x 10 x $ 0.58 = $ 533.60
You should still to be prepared prior to trading for the fact that you will have to close a part of the opened orders (maybe even greater part of them) at a loss. It is inevitable! However, in order to make money, it is not necessarily always go out the market in the black. The main thing is to earn more than you lose