I feel this happens to me more than it does to most people … perhaps you can reassure me that it happens to you too? I walk into a room of familiar faces, and realise that I can’t remember any of their names.
I know these people well enough that I should know their names, so I feel too embarrassed to ask. The result is that I awkwardly go about saying, “Hi, good to see you” … hoping to bluff my way through, and praying that my wife doesn’t come over and expect to be introduced.
Feeling that we ‘should’ know stuff can paralyze us from asking the questions and gathering the information we need to progress …
1. What is a pip, and how do I read pip levels off charts?
If you’re new to Forex trading, then the concept of pip value can be pretty opaque. And if you’re a regular Forex trader, I’m sure it’s happened that, at some point (I know it has to me), that you’ve made a mistake with pip values and risked more, or made less than you should have on a trade.
So, why are forex prices measured this way, and how do we get our heads around it?
Forex prices are a measure of the value of one currency against another – and the size of these relative movements are measured in pips. “Pip” stands for “percentage in point”.
Until a few years ago, currency pairs were generally measured to four decimal places (with some exceptions, which I’ll come to in a moment). So, if the value of the US dollar against the value of the GB pound was £1 being worth $1.3100 … this would be shown as 13100 pips.
The reality is that now most currency pairs are shown to 5 decimal places, so you have to watch that you’re getting your pip place correct.
Here’s a GBPUSD chart …
This shows that the current value of £1 is $1.31368. To get the pip value, we need to read to the fourth decimal place, so it would be 13136.8 pips.
But, there are exceptions … namely, any involving the Japanese Yen, where a pip is 0.01. So, if you’re looking at a chart like this …
Here we see that $1 is worth 114.127 Japanese Yen, but the pip value of this is to 2 decimal places, making it 11412.7 pips.
If you are ever unsure, the easiest way to check the pip value is to open a trade ticket. The larger bold numbers will be will highlight the pip value. For each one point move this figure makes you profit/loss will go up or down by your stake.
2. When should a daily candle start and end in a 24-hour, international market?
This is a real bugbear for some forex traders.
In a market that’s famed as international and open for 24 hours … who’s to say when one day ends and another starts?
And, does it really matter?
It’s a confusing area, with no clear consensus, and you’ll find that every broker has their daily switch-over time which is what their standard charting package is set to. Generally this happens at UK midnight, but can also be tied in with the brokers’ rollover times.
But many Forex traders object to using the UK midnight as their daily candle close time, feeling that the bigger US market should be the standard.
That said, midnight in the UK is after US markets have closed, and is without doubt slap in the middle of the ‘graveyard shift’ of forex trading. For me personally, it’s as good a time as any to change from one day to the next.
3. How small a trading fund can I really start with?
The standard line on trading fund size is that you need a minimum of £1,000 to get started. If you are looking to trade with a small pot, then your minimum stake per pip is going to be key.
Some brokers minimum is £1 per pip. If you were following a strategy with an average 100 pip stop, you will be risking 10% of your £1000 per trade.
This is way too much and whilst hypothetically possible to do profitably, will most likely result in you getting cleared out.
However the same strategy with a 10p stake will have you risking just 1% of your pot per trade, which, and this does depend on the strategy you are using, sounds like a much more sensible level of risk.
You don’t need to load the £1,000 into your account to get started – it can feel daunting. There are ways get started without having to make that kind of commitment.
• First off, you can mentally commit £1,000 to your trading, but you definitely don’t need to load that money straight into your account. Put enough into your account to cover a few losses and your margin requirements, with a view to ‘topping up’ when needed. For example, if you are risking 2% per trade, each open trade you have on the account will need a fund of £20 to cover the risk of a loss.
• Assuming that you’ve already demo traded until you’re confident, you can start off live trading with minimum stakes while you get used to trading with real money. Sure, trading minimum stakes is unlikely to make your fortune, but it gets you used to the feeling of making (and losing) real money – which is very different to managing a demo account.
• There are trading methods out there that are suitable for very small funds. These are ones that trade markets that allow very low stakes – some brokers will allow you to start off as low as 10p per point. They also need to be methods that don’t require you to tie up your money in lots of trades at the same time, and which don’t have wide stop levels, so you can keep risk nice and tight.
You can go too far with this however. Scalping strategies have very small stops, often less than 10 pips, whilst this may seem like a very good way to keep your risk small, scalping is a very difficult skill to pull off consistently and really only for experienced traders, probably using software to run manage positions.
4. How are different forex markets correlated?
Correlated markets are ones that have a tendency to move together. This might be a positive correlation, if they move in the same direction; or a negative correlation, if they move in opposite directions.
Correlations don’t stand still, so markets that are moving together this month, may move apart next month.
However, there are some market correlations that have fundamental driving forces behind them, making them more reliable. Here are some key correlations to outside forces that can shake the forex markets …
• Because Australia is a major supplier of gold, the Australian dollar has a strong correlation with gold prices. This means that AUDUSD is positively correlated to gold prices – i.e. if one goes up, the other tends to go up too; and if one goes down, the other tends to fall too.
• Like gold and the AUD, the Swiss Franc and the Japanese Yen have a ‘safe haven’ status – which means that investors will buy these currencies if they’re feeling jittery about the state of global stock markets. Therefore, both USDJPY and USDCHF have a negative correlation with gold.
• Canada is a top oil producer, so the Canadian dollar is closely tied to the price of oil, making USDCAD negatively correlated to the price of oil.
• Bond yields are the returns investors get when they loan money to the government, and a rising bond yield is linked to increased inflation, and is bullish for that particular currency. For that reason, forex investors look at the ‘bond spread’ between countries (i.e. the difference between their bond yield) as a measure of how their currencies will move against each other. If the bond yield in Australia is growing faster than the bond yield in the US – this is a sign that the value of the AUD could grow against the value of the USD.
5. Do I need multiple screens for my computer?
You’ve probably seen photos of ‘home trading stations’ like the one below …
And if you’d like to decorate a corner of your house that way, and your partner is okay with it … who am I to stand in your way?
But I can categorically say that there’s no need for multiple screens, expensive data feeds (beyond your broadband link), nor international time-zone clocks.
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