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6 Crucial Things to Consider When Choosing a Forex Broker

The retail forex market is so competitive that just thinking about having to sift through all the available brokers can give you a major headache.

Choosing which forex broker to trade with can be a very overwhelming task especially if you don’t know what you should be looking for.

In this section, we will discuss the qualities you should look for when picking a forex broker.

1. Security

Forex Broker ChecklistThe first and foremost characteristic that a good broker must have is a high level of security. After all, you’re not going to hand over thousands of dollars to a person who simply claims he’s legit, right?

Fortunately, checking the credibility of a forex broker isn’t very hard. There are regulatory agencies all over the world that separate the trustworthy from the fraudulent.

Below is a list of countries with their corresponding regulatory bodies:

  • United States: National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC)
  • United Kingdom: Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA)
  • Australia: Australian Securities and Investment Commission (ASIC)
  • Switzerland: Swiss Federal Banking Commission (SFBC)
  • Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)
  • France: Autorité des Marchés Financiers (AMF)
  • Canada:  Investment Information Regulatory Organization of Canada (IIROC)

Before even THINKING of putting your money in a broker, make sure that the broker is a member of the regulatory bodies mentioned above.

2. Transaction Costs

No matter what kind of currency trader you are, like it or not, you will always be subject to transaction costs.

Every single time you enter a trade, you will have to pay for either the spread or a commission so it is only natural to look for the most affordable and cheapest rates.

Sometimes you may need to sacrifice low transaction for a more reliable broker.

Make sure you know if you need tight spreads for your type of trading, and then review your available options. It’s all about finding the correct balance between security and low transaction costs.

3. Deposit and Withdrawal

Good FX brokers will allow you to deposit funds and withdraw your earnings hassle-free.

Brokers really have no reason to make it hard for you to withdraw your profits because the only reason they hold your funds is to facilitate trading.

Your broker only holds your money to make trading easier so there is no reason for you to have a hard time getting the profits you have earned. Your broker should make sure that the withdrawal process is speedy and smooth.

4. Trading Platform

In online forex trading, most trading activity happens through the brokers’ trading platform. This means that the trading platform of your broker must be user-friendly and stable.

When looking for a broker, always check what its trading platform has to offer.

Does it offer free news feed? How about easy-to-use technical and charting tools? Does it present you with all the information you will need to trade properly?

5. Execution

It is mandatory that your broker fills you at the best possible price for your orders.

Under normal market conditions (e.g. normal liquidity, no important news releases or surprise events), there really is no reason for your broker to not fill you at, or very close to, the market price you see when you click the “buy” or “sell” button.

For example, assuming you have a stable internet connection, if you click “buy” EUR/USD for 1.3000, you should get filled at that price or within micro-pips of it. The speed at which your orders get filled is very important, especially if you’re a scalper.

A few pips difference in price can make that much harder on you to win that trade.

6. Customer Service

Forex Broker Customer ServiceBrokers aren’t perfect, and therefore you must pick a broker that you could easily contact when problems arise.

The competence of brokers when dealing with account or technical support issues is just as important as their performance on executing trades.

Brokers may be kind and helpful during the account opening process, but have terrible “after sales” support.

 

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Dealing Desk vs. No Dealing Desk Forex Brokers

Which type of broker should I choose? A dealing desk broker? Or a no dealing desk broker?

That’s completely up to you! One type of broker isn’t better than the other because it will all depend on the type of trader you are.

It’s up to you to decide whether you’d rather have tighter spreads but pay a commission per trade, versus wider spreads and no commissions.

Usually, day traders and scalpers prefer the tighter spreads because it is easier to take small profits as the market needs less ground to cover to get over transaction costs.

Meanwhile, wider spreads tend to be insignificant to longer term swing or position traders.

To make your decision-making easier, here’s a summary of the major differences between Market Makers, STP brokers, and STP+ECN brokers:

Dealing Desk
(Market Maker)
No Dealing Desk (STP) No Dealing Desk (STP+ECN)
Fixed Spreads Most have variable spreads Variable spreads or commission fees
Take the opposite side of your trade Simply a bridge between client and liquidity provider A bridge between client and liquidity provider and other participants
Artificial quotes Prices come from liquidity providers Prices come from liquidity providers and other ECN participants
Orders are filled by broker on a discretionary basis Automatic execution, no re-quotes Automatic, no re-quotes
Displays the Depth of Market (DOM) or liquidity information

Brokers are not evil… Well most of them aren’t!

Contrary to what you may have read elsewhere, forex brokers really aren’t out to get you.

They want to do business with you, and not run you out of business! Think about it, if you lose all your money in trading, they too will lose customers.

The ideal client of dealing desk brokers is the one who more or less breaks even. In other words, a client who neither wins nor losses at the end.

That way, the broker earns money on the client’s transactions, but at the same time, the client stays in the game by not blowing out his account. In essence, brokers want their clients to keep coming back for more (trading)!

 

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Forex Broker Types: Dealing Desk and No Dealing Desk

The first step in choosing a forex broker is finding out what your choices are.

You don’t just walk into a restaurant, knowing what to order right away, do you?

Not unless you’re a frequent customer there, of course. More often than not, you check out their menu first to see what they have to offer.

There are two main types of forex brokers:

  1. Dealing Desks (DD)
  2. No Dealing Desks (NDD).

Dealing Desk brokers are also called Market Makers.

No Dealing Desks can be further subdivided into:

  • Straight Through Processing (STP) and
  • Electronic Communication Network + Straight Through Processing (ECN+STP).

Dealing Desk vs. No Dealing Desk Forex Brokers

What is a Dealing Desk Broker?

Forex brokers that operate through Dealing Desk (DD) brokers make money through spreads and providing liquidity to their clients. Also called “market makers,”

 

Dealing Desk brokers literally create a market for their clients, meaning they often take the other side of a clients trade.

While you may think that there is a conflict of interest, there really isn’t.

Market makers provide both a sell and buy quote, which means that they are filling both buy and sell orders of their clients; they are indifferent to the decisions of an individual trader.

Since market makers control the prices at which orders are filled, it also follows that there is very little risk for them to set FIXED spreads (you will understand why this is so much better later).

Also, clients of dealing desk brokers do not see the real interbank market rates. Don’t be scared though. The competition among brokers is so stiff that the rates offered by Dealing Desks brokers are close, if not the same, to the interbank rates.

Trading using a Dealing Desk broker basically works this way:

Let’s say you place a buy order for EUR/USD for 100,000 units with your Dealing Desk broker.

To fill you, your broker will first try to find a matching sell order from its other clients or pass your trades on to its liquidity provider, i.e. a sizable entity that readily buys or sells a financial asset.

By doing this, they minimize risk, as they earn from the spread without taking the opposite side of your trade.

However, in the event that there are no matching orders, they will have to take the opposite side of your trade.

Take note that different forex brokers have different risk management policies, so make sure to check with your own broker regarding this.

What is a No Dealing Desk Broker?

As the name suggests, No Dealing Desk (NDD) brokers do NOT pass their clients’ orders through a Dealing Desk.

This means that they do not take the other side of their clients’ trade as they simply link two parties together.

NDDs are like bridge builders: they build a structure over an otherwise impassable or hard-to-pass terrain to connect two areas.

NDDs can either charge a very small commission for trading or just put a markup by increasing the spread slightly.

No Dealing Desk brokers can either be STP or STP+ECN.

What is an STP Broker?

Some brokers claim that they are true ECN brokers, but in reality, they merely have a Straight Through Processing system.

Forex brokers that have an STP system route the orders of their clients directly to their liquidity providers who have access to the interbank market.

NDD STP brokers usually have many liquidity providers, with each provider quoting its own bid and ask price.

Let’s say your NDD STP broker has three different liquidity providers. In their system, they will see three different pairs of bid and ask quotes.

Bid Ask
Liquidity Provider A 1.2998 1.3001
Liquidity Provider B 1.2999 1.3001
Liquidity Provider C 1.3000 1.3002

Their system then sorts these bid and ask quotes from best to worst. In this case, the best price in the bid side is 1.3000 (you want to sell high) and the best price on the ask side is 1.3001 (you want to buy low). The bid/ask is now 1.3000/1.3001.

Will this be the quote that you will see on your platform?

Of course not!

Your broker isn’t running a charity! Your broker didn’t go through all that trouble of sorting through those quotes for free!

To compensate them for their trouble, your broker adds a small, usually fixed, markup. If their policy is to add a 1-pip markup, the quote you will see on your platform would be 1.2999/1.3002.

You will see a 3-pip spread. The 1-pip spread turns into a 3-pip spread for you.

So when you decide to buy 100,000 units of EUR/USD at 1.3002, your order is sent through your broker and then routed to either Liquidity Provider A or B.

If your order is acknowledged, Liquidity Provider A or B will have a short position of 100,000 units of EUR/USD 1.3001, and you will have a long position of 100,000 units of EUR/USD at 1.3002. Your broker will earn 1 pip in revenue.

This changing bid/ask quote is also the reason why most STP type brokers have variable spreads. If the spreads of their liquidity providers widen, they have no choice but to widen their spreads too.

While some STP brokers do offer fixed spreads, most have VARIABLE spreads.

What is an ECN Broker?

True ECN forex brokers, on the other hand, allow the orders of their clients to interact with the orders of other participants in the ECN.

Participants could be banks, retail traders, hedge funds, and even other brokers. In essence, participants trade against each other by offering their best bid and ask prices.

ECNs also allow their clients to see the “Depth of Market.”

Depth of Market displays where the buy and sell orders of other market participants are. Because of the nature ECN, it is very difficult to slap on a fixed markup so ECN brokers usually get compensated through a small COMMISSION.

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Foreign Regulatory Agencies

UK: The FCA and PRA

If you live in the U.K., the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) are for you!

On April 1, 2013, both of these agencies replaced the Financial Services Authority (FSA) as the financial industry’s regulatory bodies.

The Financial Conduct Authority is a non-government agency funded by the firms they regulate, and they are accountable to a Board appointed by the Treasury.

Their goal is to protect consumers, ensure industry stability, and promote healthy competition in the financial services industry through the regulation of financial advisers, asset managers, or any firm not covered by the PRA.

FCA website: http://www.fca.org.uk

The Prudential Regulation Authority is a part of the Bank of England, and their main role is to promote a healthy UK financial system through the regulation and supervision of banks, credit unions, major investment firms, and insurers.

PRA website: http://www.bankofengland.co.uk/pra

Foreign Forex Regulatory Agencies

Denmark: Finanstilsynet

The Danish FSA was formed in January 1988 and was charged with supervising financial activities in Denmark. Members of the FSA are monitored in an attempt to protect investors and prevent market abuse.

Finanstilsynet’s website: http://www.dfsa.dk/en.aspx

Switzerland: Swiss Federal Department of Finance

The Federal Department of Finance or FDF was formed in 1848. While the FDF is the overseer of financials in Switzerland, it is the Swiss Financial Market Supervisory Authority or FINMA that regulates the banks, securities dealers, and stock exchanges.

FINMA acts like the big brother in Switzerland and does pretty much the same as the other regulatory agencies.

FDF’s website: http://www.efd.admin.ch/index.html?lang=en

FINMA’s website: http://www.finma.ch/e/Pages/default.aspx

Switzerland: Association Romande des intermediares financiers

This organization is similar to FINMA in that they are both from Switzerland, but this body is based on the French-speaking part of Switzerland. ARIF was formed in 1999. It too acts as a regulatory agency with members abiding by certain rules and laws.

ARIF’s website: http://www.arif.ch/en/index.htm

Hong Kong Securities and Futures Commission

The Hong Kong Securities and Futures Commission (SFC) was formed in May 1989 due to ineffective efforts of two regulating bodies. With a combined single organization, the SFC took charge. It monitors all futures and securities-related activities in Hong Kong.

SFC’s website: http://www.sfc.hk/sfc/html/EN/index.html

Australian Securities and Investments Commission

Founded in 1991, the Australian Securities and Investments Commission (ASIC) acts as a corporate regulator in Australia. ASIC regulates companies, financial markets, and financial service organizations as well as insurance, and credit.

The organization aims to maintain fairness in the market environment.

ASIC’s website: http://www.asic.gov.au/asic/asic.nsf

 

THE WORLD’S BEST FOREX BROKER IS AN ASIC REGULATED BROKER!

Click here to visit the broker’s website.

 

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History of Retail Forex Trading

Now that you know a little about forex, you’re probably itching to start your pippin’ adventures.

But before you set off on your journey, you need one more thing… An actual account with a broker!

Of course, we want you to work with a broker that will provide the right services for your individual needs, so we decided to come up with this section to walk you through the right things to consider when choosing!

Forex History

But first, we’ll begin by revisiting the pages of history to find out how brokers came to life.

Name the best thing that the mighty powers of the Internet have brought us. YouTube, Facebook, Netflix, XNTRADES.com… Yes, those are all awesome.

But what we want to talk about is the greatest gift to forex junkies like you and me: Retail FX trading!

In fact, forex junkies probably wouldn’t exist if not for the birth of online forex brokers.

You see, back in the 90s, it was much more difficult to participate in the retail FX market because of higher transactions costs.

At that time, governments were like strict parents keeping a watchful eye on exchanges, restricting their activities. After a time, the CFTC decided that enough is enough.

They passed a couple of bills, namely the Commodity Exchange Act and the Commodity Futures Modernization Act, and opened the doors for online forex brokers.

Since almost everyone had access to the worldwide web, opening an account with a forex broker was simple and convenient.

Various forex brokers started popping up here and there, eager to take advantage of the booming forex industry.

But now that there are many choices out there, it’s a little tougher to distinguish between the good brokers and the evil ones.

We’re not kidding about the evil ones, which are also known as bucket shops, and we’ll delve into that a little later.

 

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Why Trade Forex: Forex vs. Stocks

There are approximately 2,800 stocks listed on the New York Stock exchange. Another 3,100 are listed on the NASDAQ.

Which one will you trade? Got the time to stay on top of so many companies?

In spot currency trading, there are dozens of currencies traded, but the majority of market players trade the four major pairs.

Aren’t four pairs much easier to keep an eye on than thousands of stocks?

Forex vs. StocksLook at Mr. Forex. He’s so confident and sexy. Mr. Stocks has no chance!

That’s just one of the many advantages of the forex market over the stock markets. Here are a few more:

24-Hour Market

The forex market is a seamless 24-hour market. Most brokers are open from Sunday at 4:00 pm EST until Friday at 4:00 pm EST, with customer service usually available 24/7.

With the ability to trade during the U.S., Asian, and European market hours, you can customize your own trading schedule.

Minimal or No Commissions

Most forex brokers charge no commission or additional transactions fees to trade currencies online or over the phone.

Combined with the tight, consistent, and fully transparent spread, forex trading costs are lower than those of any other market.

Most brokers are compensated for their services through the bid/ask spread.

Instant Execution of Market Orders

Your trades are instantly executed under normal market conditions. Under these conditions, usually the price shown when you execute your market order is the price you get.

You’re able to execute directly off real-time streaming prices (Oh yeeeaah! Big time!).

 

Keep in mind that many brokers only guarantee stop, limit, and entry orders under normal market conditions. Trading during a massive alien invasion from outer space would not fall under “normal market” conditions.

Fills are instantaneous most of the time, but under extraordinarily volatile market conditions, like during Martian attacks, order execution may experience delays.

Short-Selling without an Uptick

Unlike the equity market, there is no restriction on short selling in the currency market. Trading opportunities exist in the currency market regardless of whether a trader is long or short, or whichever way the market is moving.

Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. So you always have equal access to trade in a rising or falling market.

No Middlemen

Centralized exchanges provide many advantages to the trader. However, one of the problems with any centralized exchange is the involvement of middlemen.

Any party located in between the trader and the buyer or seller of the security or instrument traded will cost them money. The cost can be either in time or in fees.

Spot currency trading, on the other hand, is decentralized, which means quotes can vary from different currency dealers.

Competition between them is so fierce that you are almost always assured that you get the best deals. Forex traders get quicker access and cheaper costs.

Buy/Sell programs do not control the market.

How many times have you heard that “Fund A” was selling “X” or buying “Z”? The stock market is very susceptible to large fund buying and selling.

In spot trading, the massive size of the forex market makes the likelihood of any one fund or bank controlling a particular currency very small.

Banks, hedge funds, governments, retail currency conversion houses, and large net worth individuals are just some of the participants in the spot currency markets where the liquidity is unprecedented.

Analysts and brokerage firms are less likely to influence the market

Have you watched TV lately? Heard about a certain Internet stock and an analyst of a prestigious brokerage firm accused of keeping its recommendations, such as “buy,” when the stock was rapidly declining?

It is the nature of these relationships. No matter what the government does to step in and discourage this type of activity, we have not heard the last of it.

IPOs are big business for both the companies going public and the brokerage houses.

Relationships are mutually beneficial and analysts work for the brokerage houses that need the companies as clients. That catch-22 will never disappear.

Foreign exchange, as the prime market, generates billions in revenue for the world’s banks and is a necessity of the global markets. Analysts in foreign exchange have very little effect on exchange rates; they just analyze the forex market.

Advantages Forex Stocks
24-Hour Trading YES No
Minimal or no Commission YES No
Instant Execution of Market Orders YES No
Short-selling without an Uptick YES No
No Middlemen YES No
No Market Manipulation YES No

In the battle between forex vs. stocks, it looks like the scorecard between Mr. Forex and Mr. Stocks shows a strong victory by Mr. Forex! Will it go for 2-0 with Mr. Futures?

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Ignoring Leverage: Why Most New Forex Traders Fail

Most professional forex traders and money managers trade one standard lot for every $50,000 in their account.

If they traded a mini account, this means they trade one mini lot for every $5,000 in their account.

Let that sink into your head for a couple seconds.

If pros trade like this, why do less experienced forex traders think they can succeed by trading 100K standard lots with a $2,000 account or 10K mini lots with $250?

No matter what the forex brokers tell you, don’t ever open a “standard account” with just $2,000 or a “mini account” with $250.

Heck, some even allow you to open accounts with just $25!

The number one reason new traders fail is not because they suck, but because they are undercapitalized from the start and don’t understand how leverage really works.

Leverage the Killer

Don’t set yourself up to fail.

We recommend that you have at least have $100,000 of trading capital before opening a standard account, $10,000 for a mini account, or $1,000 for a micro account.

Of course, open an account only when you are consistently good.

So if you only have $60,000, open a mini account. If you only have $8,000, open a micro account.

If you only have $250, open a demo account and stick with it until you come up with the additional $750, then open a micro account. If you have $1, find a job.

If you don’t remember anything else in this lesson, at least remember what you just read above.

Okay, please re-read the previous paragraph and ingrain it in your memory. Just because brokers allow you to open an account with only $25 does NOT mean you should.

Here’s why:

We believe most new traders who open a forex trading account with the bare minimum deposit do so because they don’t completely understand what the terms “leverage” and “margin” really are and how it affects their trading.

It’s crucial that you’re fully aware and free of ignorance of the significance of trading with leverage.

If you don’t have rock solid understanding of leverage and margin, we guarantee that you will BLOW YOUR TRADING ACCOUNT!

Forex Leverage

 

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Why Trade Forex: Advantages Of Forex Trading

There are many benefits and advantages of trading forex.

Here are just a few reasons why so many people are choosing this market:

No commissions

No clearing fees, no exchange fees, no government fees, no brokerage fees. Most retail forex brokers are compensated for their services through something called the “spread“.

No fixed lot size

In the futures markets, lot or contract sizes are determined by the exchanges. A standard size contract for silver futures is 5,000 ounces.

In spot forex, you determine your own lot, or position size. This allows traders to participate with accounts as small as $25 (although we’ll explain later why a $25 account is a bad idea).

Low transaction costs

The retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market conditions. For larger transactions, the spread could be as low as 0.07%. Of course, this depends on your leverage and all that will be explained later.

A 24-hour market

There is no waiting for the opening bell. From the Monday morning opening in Australia to the afternoon close in New York, the forex market never sleeps.

This is awesome for those who want to trade on a part-time basis because you can choose when you want to trade: morning, noon, night, during breakfast, or in your sleep.

No one can corner the market

The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank or the mighty Chuck Norris himself) can control the market price for an extended period of time.

Leverage

In forex trading, a small deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum.

For example, a forex broker may offer 50-to-1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $2,500 worth of currencies. Similarly, with $500 dollars, one could trade with $25,000 dollars and so on.

While this is all gravy, let’s remember that leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.

High Liquidity

Because the forex market is so enormous, it is also extremely liquid. This is an advantage because it means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will as there will usually be someone in the market willing to take the other side of your trade.

You are never “stuck” in a trade. You can even set your online trading platform to automatically close your position once your desired profit level (a limit order) has been reached, and/or close a trade if a trade is going against you (a stop loss order).

Low Barriers to Entry

You would think that getting started as a currency trader would cost a ton of money. The fact is, when compared to trading stocks, options or futures, it doesn’t. Online forex brokers offer “mini” and “micro” trading accounts, some with a minimum account deposit of $25.

We’re not saying you should open an account with the bare minimum, but it does make forex trading much more accessible to the average individual who doesn’t have a lot of start-up trading capital.

Free Stuff Everywhere!

Most online forex brokers offer “demo” accounts to practice trading and build your skills, along with real-time forex news and charting services.

And guess what?! They’re all free!

Demo accounts are very valuable resources for those who are “financially hampered” and would like to hone their trading skills with “play money” before opening a live trading account and risking real money.

Now that you know the advantages of the forex market, see how it compares with the stock market!

 

What is a Pip in Forex?

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Here is where we’re going to do a little math. Just a little bit.

You’ve probably heard of the terms “pips,” “pipettes,” and “lots” thrown around, and now we’re going to explain what they are and show you how their values are calculated.

Learn About Pips in Forex

Take your time with this information, as it is required knowledge for all forex traders.

Don’t even think about trading until you are comfortable with pip values and calculating profit and loss.

What the heck is a Pip?

The unit of measurement to express the change in value between two currencies is called a “pip.”

If EUR/USD moves from 1.1050 to 1.1051, that .0001 USD rise in value is ONE PIP.

A pip is usually the last decimal place of a price quote.

Most pairs go out to 4 decimal places, but there are some exceptions like Japanese yen pairs (they go out to two decimal places).

For example, for EUR/USD, it is 0.0001, and for USD/JPY, it is 0.01.

Pip

What is a Pipette?

There are forex brokers that quote currency pairs beyond the standard “4 and 2” decimal places to “5 and 3” decimal places.

They are quoting FRACTIONAL PIPS, also called “pipettes.”

If the concept of a “pip” isn’t already confusing enough for the new forex trader, let’s try to make you even more confused and point out that a “pipette” or “fractional pip” is equal to a “tenth of a pip“.

For instance, if GBP/USD moves from 1.30542 to 1.30543, that .00001 USD move higher is ONE PIPETTE.

 

Here’s how fractional pips look like on a trading platform:

 

 

 

 

 

 

On trading platforms, the digit representing a tenth of a pip usually appears to the right of the two larger digits.

Here’s a pip “map” to help you to learn how to read pips…

 

How to Calculate the Value of a Pip

As each currency has its own relative value, it’s necessary to calculate the value of a pip for that particular currency pair.

In the following example, we will use a quote with 4 decimal places.

For the purpose of better explaining the calculations, exchange rates will be expressed as a ratio (i.e., EUR/USD at 1.2500 will be written as “1 EUR / 1.2500 USD”)

Example #1: USD/CAD = 1.0200

To be read as 1 USD to 1.0200 CAD (or 1 USD/1.0200 CAD)

(The value change in counter currency) times the exchange rate ratio = pip value (in terms of the base currency)

[.0001 CAD] x [1 USD/1.0200 CAD]

Or simply as:

[(.0001 CAD) / (1.0200 CAD)] x 1 USD = 0.00009804 USD per unit traded

Using this example, if we traded 10,000 units of USD/CAD, then a one pip change to the exchange rate would be approximately a 0.98 USD change in the position value (10,000 units x 0.0000984 USD/unit).

We say “approximately” because as the exchange rate changes, so does the value of each pip move.

Example #2: GBP/JPY = 123.00

Here’s another example using a currency pair with the Japanese Yen as the counter currency.

Notice that this currency pair only goes to two decimal places to measure a 1 pip change in value (most of the other currencies have four decimal places). In this case, a one pip move would be .01 JPY.

(The value change in counter currency) times the exchange rate ratio = pip value (in terms of the base currency)

[.01 JPY] x [1 GBP/123.00 JPY]

Or simply as:

[(.01 JPY) / (123.00 JPY)] x 1 GBP = 0.0000813 GBP

So, when trading 10,000 units of GBP/JPY, each pip change in value is worth approximately 0.813 GBP.

Finding the Pip Value in your Account Denomination

The final question to ask when figuring out the pip value of your position is, “What is the pip value in terms of my account currency?”

After all, it is a global market and not everyone has their account denominated in the same currency.

This means that the pip value will have to be translated to whatever currency our account may be traded in.

This calculation is probably the easiest of all; simply multiply/divide the “found pip value” by the exchange rate of your account currency and the currency in question.

If the “found pip value” currency is the same currency as the base currency in the exchange rate quote:

Using the GBP/JPY example above, let’s convert the found pip value of .813 GBP to the pip value in USD by using GBP/USD at 1.5590 as our exchange rate ratio.

If the currency you are converting to is the counter currency of the exchange rate, all you have to do is divide the “found pip value” by the corresponding exchange rate ratio:

.813 GBP per pip / (1 GBP/1.5590 USD)

Or

[(.813 GBP) / (1 GBP)] x (1.5590 USD) = 1.2674 USD per pip move

So, for every .01 pip move in GBP/JPY, the value of a 10,000 unit position changes by approximately 1.27 USD.

If the currency you are converting to is the base currency of the conversion exchange rate ratio, then multiply the “found pip value” by the conversion exchange rate ratio.

Using our USD/CAD example above, we want to find the pip value of .98 USD in New Zealand Dollars. We’ll use .7900 as our conversion exchange rate ratio:

0.98 USD per pip X (1 NZD/.7900 USD)

Or

[(0.98 USD) / (.7900 USD)] x (1 NZD) = 1.2405 NZD per pip move

For every .0001 pip move in USD/CAD from the example above, your 10,000 unit position changes in value by approximately 1.24 NZD.

Even though you’re now a math genius–at least with pip values–you’re probably rolling your eyes back and thinking, “Do I really need to work all this out?”

Well, the answer is a big fat NO. Nearly all forex brokers will work all this out for you automatically, but it’s always good for you to know how they work it out.

If your broker doesn’t happen to do this, don’t worry! You can use our Pip Value Calculator! Aren’t we awesome?!

In the next lesson, we will discuss how these seemingly insignificant amounts can add up.

 

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