Forex Training Series

Non Forex traders are generally under the impression that the math involved with Forex trading is more complicated than in other forms of trading. Truth is the math involved in currency trading is exactly the same as in any other form of trading. We use the same addition, subtraction, multiplication and division we learned in grade school.

In stock trading the evening news anchor announces the Dow gained 30 “points” today, and in Forex trading we hear the US Dollar is up 30 “pips.” Well that’s fine, but points and pips won’t pay our rent. So let’s convert “points” and “pips” using the basics of Forex math into what it means to us – money. This section will cover basic, but very important principles we utilize in our daily trading activities - prices.

The first thing that you’ll notice about the prices in most currency pairs is they have a couple extra numbers in them compared to a stock quote, or the actual currency exchange rate listed in the travel guide. A typical stock quote looks like “Sprint = 5.71” in the financial section of your local paper; and the published Canadian Dollar to US Dollar exchange rate looks like 1 US Dollar = .98 Canadian Cents. But the traded currency pair rate we use in the Forex market for the same currency is USD/CAD = 0.9887.

Two main reasons exist for breaking down the unit of currency past the .01 cent level. First - the sheer volume of trading on the currency market. The Forex market trades more money in one day than all the stock markets combined trade in a month. Second - the size of the lots we trade in Forex. Stocks typically trade in 100 share standard lots, whereas one standard lot of a currency pair is 100,000 units of the base currency. A full one cent move on a currency pair is a very large movement when considering the huge amount of money being shifted; hence we need to monitor currency prices down to the sub penny level, usually four decimal places out.