Key Concepts
Traders have equal opportunities to profit regardless of whether the exchange rate is rising or falling.
The number of pips a currency pair moves determines how much a trader will earn or lose on the position.
One of the premier advantages of the foreign exchange market is that profit opportunities are equally present in all market conditions; it is just as easy to profit when the exchange rate is declining as it is when the rate is rising. If, for example, Trader A believes the pound will fall against the value of the US dollar – meaning 1 pound will buy fewer US dollars – then he can simply place an order to sell GBP/USD. This trade works in essentially the same manner as the trade to go long (buy) the pair, with the only
difference being which currency is being bought and sold. Let’s assume Trader A believes that the GBP will decline in value with respect to the USD -- in other words, that the exchange rate will fall from the 1.8455 level. Accordingly, he places an order to sell 1 lot of GBP/USD, thus borrowing 100,000 pounds and buying an equivalent amount of USD with the proceeds. Since 1 pound can purchase 1.8455 US dollars at the time Trader A places his trade, he can purchase 184,550 US dollars with the 100,000 pounds he borrowed. As in the previous example, the borrowed amount will be repaid when the transaction is closed. Let’s assume that Trader A is correct in his belief that the pound will fall in value against the USD, and that the GBP/USD reaches 1.8355 – a drop of 100 pips from Trader A’s entry point. Now, Trader A decides to take his profit and close out the trade. Accordingly, he must repay the 100,000 pounds that were borrowed. Since the cost of 1 pound has now dropped to 1.8355, this means that the cost of 100,000 pounds is 183,550 (100,000 * 1.8355). This amount is then subtracted from 184,550, which was the number of dollars that Trader A received when he initially placed the trade. The result is a profit of $1,000 (184,550 – 183,550).
A summary of the transaction is as follows:
Initial transaction: 100,000 pounds were borrowed and exchanged for US dollars at a rate of 1.8455 US dollars per pound, or a total of 184,550 USD Final transaction: The borrowed amount of 100,000 pounds was repaid at a cost of 1.8355 US dollars per pound, or a total of 183,550 USD Amount of pounds initially borrowed: 100,000 Amount of pounds repaid via close of trade: 100,000 Net number of pounds: 0
Amount of dollars initially purchased: 184,550
Amount of dollars used to pay off the 100,000 pounds that were borrowed: 183,550
Dollars remaining after borrowed pounds are paid off: 1,000
In the examples given above, Trader A had the potential to earn a profit of $1,000 when the exchange rate rose 100 pips and also when it fell 100 pips. For any currency pair in which the US dollar is the second in the pair – like the GBP/USD, EUR/USD, AUD/USD, and NZD/USD – the value of a pip is fixed at $10 per 100,000 unit lot. In the Mini account, where a mini lot is 1/10th the size of a 100k lot, the pip value is 1/10th that of the 100K account. Accordingly, the pip value for any pair in which the USD is the counter currency is fixed at $1.
Traders have equal opportunities to profit regardless of whether the exchange rate is rising or falling.
The number of pips a currency pair moves determines how much a trader will earn or lose on the position.
One of the premier advantages of the foreign exchange market is that profit opportunities are equally present in all market conditions; it is just as easy to profit when the exchange rate is declining as it is when the rate is rising. If, for example, Trader A believes the pound will fall against the value of the US dollar – meaning 1 pound will buy fewer US dollars – then he can simply place an order to sell GBP/USD. This trade works in essentially the same manner as the trade to go long (buy) the pair, with the only
difference being which currency is being bought and sold. Let’s assume Trader A believes that the GBP will decline in value with respect to the USD -- in other words, that the exchange rate will fall from the 1.8455 level. Accordingly, he places an order to sell 1 lot of GBP/USD, thus borrowing 100,000 pounds and buying an equivalent amount of USD with the proceeds. Since 1 pound can purchase 1.8455 US dollars at the time Trader A places his trade, he can purchase 184,550 US dollars with the 100,000 pounds he borrowed. As in the previous example, the borrowed amount will be repaid when the transaction is closed. Let’s assume that Trader A is correct in his belief that the pound will fall in value against the USD, and that the GBP/USD reaches 1.8355 – a drop of 100 pips from Trader A’s entry point. Now, Trader A decides to take his profit and close out the trade. Accordingly, he must repay the 100,000 pounds that were borrowed. Since the cost of 1 pound has now dropped to 1.8355, this means that the cost of 100,000 pounds is 183,550 (100,000 * 1.8355). This amount is then subtracted from 184,550, which was the number of dollars that Trader A received when he initially placed the trade. The result is a profit of $1,000 (184,550 – 183,550).
A summary of the transaction is as follows:
Initial transaction: 100,000 pounds were borrowed and exchanged for US dollars at a rate of 1.8455 US dollars per pound, or a total of 184,550 USD Final transaction: The borrowed amount of 100,000 pounds was repaid at a cost of 1.8355 US dollars per pound, or a total of 183,550 USD Amount of pounds initially borrowed: 100,000 Amount of pounds repaid via close of trade: 100,000 Net number of pounds: 0
Amount of dollars initially purchased: 184,550
Amount of dollars used to pay off the 100,000 pounds that were borrowed: 183,550
Dollars remaining after borrowed pounds are paid off: 1,000
In the examples given above, Trader A had the potential to earn a profit of $1,000 when the exchange rate rose 100 pips and also when it fell 100 pips. For any currency pair in which the US dollar is the second in the pair – like the GBP/USD, EUR/USD, AUD/USD, and NZD/USD – the value of a pip is fixed at $10 per 100,000 unit lot. In the Mini account, where a mini lot is 1/10th the size of a 100k lot, the pip value is 1/10th that of the 100K account. Accordingly, the pip value for any pair in which the USD is the counter currency is fixed at $1.
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