Forex trading newbie question ?

Discussion in 'Forex Trading' started by Digs, Mar 11, 2006.

  1. Digs

    Digs

    Concerning the EURUSD...
    1 Contract/lot = $100,000 of BASE
    ie EURUSD 1 lot is $100,000 euros, or @1.3225 rate $75614 USD

    The BASE is the FIRST PART OF PAIR, thats EUR of EURUSD

    A pip/point is worth 0.0001 of $100,000 euros or $10 euros.



    Concerning the USDJPY
    1 Contract/lot = $100,000 of BASE
    ie USDJPY 1 lot is $100,000 USD or @119.06 rate $11906000 JPY

    The BASE is the FIRST PART OF PAIR, thats USD of USDJPY

    A pip/point is worth 0.01 of $100,000 USD or $100 USD.

    Please confirm my understandings
     
  2. oneway

    oneway

    It doesn't work like that...or not entirely...

    The one thing that is critically important to understand is that contracts are derivitives of the currency...and not a derivitive of the "Pair".

    This is super critical to understand because if you want go long the USDJPY pair, you need to SHORT the JPY contracts.

    When the USDJPY pair goes up...that means the Dollar is gaining strength relative to the Yen. If you follow a service that is long "Yen"...they are in fact short the yen from a contract perspective...

    Remember that whenever the Dollar is the numerator of a pair, you short the contract of the denominator to go long the Dollar...

    Whenever the Dollar is the denominator of the pair, like with EUR,GBP and the AUD, then the contract prices consistent with the pairs. Of course the pricing has a premium for the forward look.

    As to Yen and Euro contracts themselves...it works like this....

    The Euro is 12.50 a pip. There is a mini contract available that prices out at 6.25 a pip.

    The Yen is the exact same way. 12.50, 6.25 for the big/mini contracts. However there is a big "but" attached to that.

    Because a 'pip' in the yen is commonly refered back against the USDYEN pair...and the the Yen contract is priced in dollars not yen...the pips in the pair are not parrallel with the pips in the contract.

    Example:

    Right now as I look at my charts the Yen's last pip-quote was 118.6150...and the last pip quote for the June Yen contracts was 0.8509.

    The pair ticks in hundreths. The contract ticks in thousands...so...it is not 1 to 1...and the rate of change varies relative the strenghth of Dollar against the Yen...

    Each Yen contract pip is 12.50, or 6.25 if you trade mini's. So when the Yen is bouncing back and forth across a pip or two...the contract will often not move...and only begins moving when the relative percentage change warrants it.

    This is a subtle yet important distinction whenever you trade a currency contract for a popular pair where the Dollar is the numerator.

    What you want to do is watch forex data, get your hands around the upside down world of dollar/x pairs when you trade the numerator as a contract...Enter and exit based on forex data...don't chart or follow the contract data...

    Trading currency contracts is a fine alternative to dealing with the actual forex market and its predatory spreads.

    Someone learning to trade forex should play with a single mini Euro or Yen...and you will pay about 5 bucks for a turn.

    I hope that helps.

    I trade both forex and currency contracts and often at the same time and against one another.

    I learned first trading the mini contracts. I do it all day long, and love a market that rarely sleeps...

    Good luck...

    Regards

    Scott
     
  3. roscko

    roscko

    Scott,

    Let me know if I understand you correctly, you recommend charting the forex pair over the mini futures contract?

    Doesn't it come back to the same thing?

    Cheers
     
  4. oneway

    oneway

    No and Yes...

    It does not come back to the same thing when the Dollar is the numerator of the pair...

    Euro is EURUSD...and the Euro is worth more than 1 dollar...so...the euro contract is roughly the same as the pair or cross rate...

    However...

    The Yen is USDYEN...and the Yen is worth lless than 1 onehundreth of a dollar...so the chart is going to be upside down...what is up is down and what is down is up...

    All that having been said...WATCH a chart of bank spreads data or FOREX...do not watch the contract...

    The contracts trade thinner and the expiration months interupt the data stream going back in history....

    If you trade contracts (and I trade both contracts and forex)...I ONLY watch the forex data in charts...

    SW
     
  5. oneway

    oneway

    Take a look at this...

    the first link is an image of the June Suisse Franc contracts...

    the second is the forex data...

    Notice three things about the first chart compared to the second chart...

    First we rolled out of March contracts on the second thursday of the month...and the data is fried...it always is crappy on rollovers...

    Second, because forex data streams nearly 24-7...the data set for the same amount of human time...is chock full or more bars and density...

    And lastly...the damn chart is upside down because your looking at a contract of a dollar numerator pair...

    http://www.headsuptrading.com/temp/paper.png

    http://www.headsuptrading.com/temp/cash.png
     
  6. Digs, it sounds like you're using the words "contract" and "lot" interchangeably, both referring to spot forex. Correct me if I am wrong.

    Now, about your understanding... you're getting close, but not quite there yet. "Long 1 lot of EUR/USD @1.3225" means "long 100,000 EUR and short 132,250 USD." So, "short 1 lot of EUR/USD @1.1909" means... your turn.

    Think of the currency quote this way: how many units of the SECOND (quote, counter, terms) currency is 1 unit of the FIRST (base) currency worth?

    1 pip is the absolute value of the minimal change in the rate, per lot. E.g., 100,000 EUR/USD @1.1901 less 100,000 EUR/USD @1.1900:

    $119,010 - $119,000 = $10. (I don't know what your "$10 euros" means.) What about GBP/USD? Other currency pairs of the form ---/USD?

    USD/JPY: you're correct on 1 lot, but not on 1 pip. Try this: what's the change in absolute value between 100,000 USD/JPY @119.06 and @119.05? Now, what's the change in absolute value between 100,000 USD/JPY @118.41 and @118.40? What can we conclude, regarding pip value of USD/JPY? What about USD/CHF? Other currency pairs of the form USD/--- ?