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How to Value Currency Pairs

By: James Theiss

Typically, in the FOREX market, currencies are traded in pairs. For example, Euro/US Dollar or US Dollar/Japanese Yen. Whenever you trade currencies online, you are then, buying one currency and selling another. Currency pairs are abbreviated. The above pairs would be EUR/USD and USD/JPY. The currency on the left is called the base currency, and the one on the right is the cross currency.

The value of a currency pair is determined by the strength or weakness of the base currency in relation to the cross currency. The base currency value is always 1. That means when you see a quote of 1.4652 for the EUR/USD, its value means 1 Euro will buy 1.4652 dollars. The next day you may see a quote for the EUR/USD of 1.4725. If you listen to the financial news you will hear them say something along the lines of, "the Euro gained strength against the Dollar today", or "the Dollar fell today against the Euro". In pocketbook english, that simply means it takes more dollars today to buy 1 Euro than yesterday.

Let's say you have an online FOREX account and bought the EUR/USD yesterday at the above price of 1.4652 and today you sold, or closed out your trade at 1.4725. That would leave a profit of 73 pips. What the heck is a pip you might ask. Well a pip has two definitions but they both mean the same thing, dollar wise at least: Price Interest Point and Percentage In Point. I have never been able to get a clear difference in the definitions no matter who I have asked, and don't really worry about it anymore because, like I said, they mean the same thing dollar wise.

When you trade currencies online you will have to open an account with a forex dealer. You can open either a standard account or a mini account. In the standard account a pip is worth approximately $10 dollars, and in the mini account it is worth approximately $1 dollar. It used to be the pip was the smallest unit of value in the FOREX market. Today however, many forex dealers quote in tenths of a pip. They have carried out the quote one extra decimal number to give better and more accurate spreads. So the above quote might have read 1.47253, where the 3 is the tenth of a pip. So its value would be either $3 dollars or $.30 cents depending on the type of account you have.

You may have noticed that I said pip values are approximately $1 dollar. That's because each currency pair has its own pip value. The true value is determined by mathematical formulas and the exchange rate of the currency pair. Some pip values are fixed and others fluctuate slightly as one currency rises or falls in value relative to the other currency in the pair.

Currency trades are made in fixed dollar amounts called lots. One lot in a standard account is equal to $1000, which controls $100,000. One lot in the mini account is equal to $100, and controls $10,000. Both standard and mini accounts typically have a 1% margin which allows the FOREX trader 100 to 1 leverage on their investment dollars.

If you trade currencies online, the ultimate goal is to capture as many pips as you can, and not get bogged down in the details of what the exact value of each currency pair is. Unless you are interested in becoming an economist or some such thing, the information presented here is more than enough to let you get on with putting as many pips in your account as possible.

James is a successful online currency trader and also runs the popular website www.todayscurrencytrading.com

Forex Snippets

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Let�s see some more information about Spread. As with all financial products, forex quotes include terms like 'bid' and 'ask�'. The 'bid', in its simplest terms is the price at which a dealer is willing to buy (and clients can sell) the base currency in exchange for the counter currency. The 'ask' is the price at which dealer will sell (and clients can buy) the base currency in exchange for the counter currency. The difference between the bid and the ask price is referred to as the spread. The spread defines the trader�s cost, which can be recovered with a favorable currency move in the market. The value of a pip is determined by the pair of currencies being traded, the rate at which the currency pair is trading and the size of the position being traded.

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With proper timing, foreign currency exchange trading can pay off big. The world's financial markets have a great deal of volatilty built in, due to the dynamic nature of their design. With millions of participants and trillions of dollars at stake daily, currency trading represents a fast-paced opportunity to earn very good money, provided you learn a profitable trading strategy.
More info on a great Forex system

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The primary factors influencing exchange rates include the balance of payments, the state of the economy, implications drawn from chart analysis as well as political and psychological factors.

All The Latest News From The What Is Forex World

European Mid Morning Update 12th March 2008

Wed, 12 Mar 2008 03:17:31 -0500
Lack of influential releases and next week's FOMC will maintain the Dollar's gradual recovery

Releases from Europe:

February Forecast Actual
French CPI (MoM) +0.4% +0.2%
French CPI (YoY) +3.0% +2.8%

Slightly better than expected CPI figure from France but with oil well above $100 pb no one is taking this as a sign that inflation has peaked. This is very unlikely to have any impact today.

The following economic releases are due today:

January
U.K. Visible Trade Deficit GBP -7.50bn
U.K. Total Trade Deficit GBP -4.60bn
Euro-zone Industrial Production (MoM) +0.4%
Euro-zone Industrial Production (YoY) +2.6%

March
Swiss ZEW Survey: Expectations
Bloomberg Global Confidence

Overnight euphoria following the central banks’ announcement of a temporary injection of over US$200 bn funding to allow primary bond dealers to swap the mortgage-backed securities that they can't currently sell for highly liquid Treasuries has abated somewhat in Asia.

Without a doubt it is a good alternative, and probably addition, to simply cutting interest rates. The market is now talking of a small rate cut from the Fed at next week’s FOMC meeting but most participants are still talking of 50bp.

Already traders are talking of selling pressure again and while there may be some it shouldn’t reach new lows with the prospect of the FOMC meeting on Tuesday next week. That in itself will restrain the market from pushing strongly one way or the other.

However, the market doesn’t like uncertainty and that provides a window for the Dollar to continue its recovery, shallow as it may well be.

There is little on the agenda to provide any great surprises either today.

Bottom picking should be the name of the game today but the problems with this is the risk of a fairly sizeable pullback following yesterday’s gains. However, over the next few days we should see the Dollar reach 104.63-80 Dollar-Yen, 1.5072-1.5144 Euro-Dollar, 1.0183-1.0215 Swissie and 2.0125-45 Pound and these should provide a cap for additional losses.

Note important support and resistance areas:

USDJPY EURUSD USDCHF GBPUSD
Res: 104.00-22 1.5460-94 1.0480-09 2.0209-18
Res: 103.20-57 1.5388-13 1.0330-52 2.0149-65

Spt: 102.48-70 1.5281-06 1.0242-82 2.0050-80
Spt: 101.93-23 1.5144-88 1.0147-83 1.9949-68

See Also

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