NFA Forex Online Learning Program
Forex can be confusing at first. How much leverage is too much leverage? What am I really buying and selling?
Seeing as there are so many Forex-related scams on the Internet, it was nice to come across this primer on the basics of currency trading written by the National Futures Association. Because they are a regulatory agency, you can assume they aren't trying to dupe you out of your money in some way another (e.g. telling you that you can use 200:1 leverage and make a billion dollars every day with no risk).
http://www.nfa.futures.org/forex_training/content/module1-1.htm
The best thing I took away from the training was the simple fact that you have to convert any foreign currency profits back to dollars to figure out the effect on your U.S. Dollar-based account. For example if you are $100,000 long the USD/CHF at 1.2350 and then you offset/sell the position at 1.2360, you just made 0.0010 SWISS FRANCS per dollar. I don't have my profit amount in dollars so I have to again use the same cross rate to convert to a dollar amount. I take 0.0010 and divide by the cross rate, 1.2362. I have to use the ASK because I'm selling my francs to get back to dollars. So 0.0010 / 1.2362 = 0.00080893...
Now I can multiply my $100,000 times this number to get my dollar profit:
$100,000 * 0.00080893... = $80.89
I found this to be pretty confusing at first, especially when you're using a cross rate where dollars is not the quote currency.
By the way, in forex notation (as in USD/CHF), the first currency (USD) is known as the "base currency" or "transaction currency," whereas the second currency is known as the "quote currency" or "settlement currency."
The first is called the base or transaction currency because it is the currency that you are going long if you hit the ask. The second is called the quote currency because it is the one that is quoted in the cross rate (i.e. it takes 1.2350 swiss francs to equal 1 u.s. dollar). It's also called the settlement currency because it is the currency in which you will have your profits before being converted back to the main currency of your trading account (usually U.S. dollars).
-Paul
Seeing as there are so many Forex-related scams on the Internet, it was nice to come across this primer on the basics of currency trading written by the National Futures Association. Because they are a regulatory agency, you can assume they aren't trying to dupe you out of your money in some way another (e.g. telling you that you can use 200:1 leverage and make a billion dollars every day with no risk).
http://www.nfa.futures.org/forex_training/content/module1-1.htm
The best thing I took away from the training was the simple fact that you have to convert any foreign currency profits back to dollars to figure out the effect on your U.S. Dollar-based account. For example if you are $100,000 long the USD/CHF at 1.2350 and then you offset/sell the position at 1.2360, you just made 0.0010 SWISS FRANCS per dollar. I don't have my profit amount in dollars so I have to again use the same cross rate to convert to a dollar amount. I take 0.0010 and divide by the cross rate, 1.2362. I have to use the ASK because I'm selling my francs to get back to dollars. So 0.0010 / 1.2362 = 0.00080893...
Now I can multiply my $100,000 times this number to get my dollar profit:
$100,000 * 0.00080893... = $80.89
I found this to be pretty confusing at first, especially when you're using a cross rate where dollars is not the quote currency.
By the way, in forex notation (as in USD/CHF), the first currency (USD) is known as the "base currency" or "transaction currency," whereas the second currency is known as the "quote currency" or "settlement currency."
The first is called the base or transaction currency because it is the currency that you are going long if you hit the ask. The second is called the quote currency because it is the one that is quoted in the cross rate (i.e. it takes 1.2350 swiss francs to equal 1 u.s. dollar). It's also called the settlement currency because it is the currency in which you will have your profits before being converted back to the main currency of your trading account (usually U.S. dollars).
-Paul
posted by Traders Edge Systems at 2:42 PM
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