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Chapter 5, Part IV. Spread, Lots, Leverage/margin and profit/loss – joining all... Page 3

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 15, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Commander in Pips: Now, what does Bid/Ask spread mean and how you understand it?

    Pipruit: Very often, but not always, there are no other commissions and fees except Bid/Ask spread. So, this is a part of my transaction costs. Different pairs could have wider or tighter spreads, depending on liquidity and trading volume. Major pairs have the smallest spread; exotic pairs usually have much wider spread.

    The major point here is that Bid/Ask spread belongs to broker and is provided by broker and we should treat it as quotes at which broker (but not you!) wants to Buy (Bid price) and Sell (Ask or Offer price). For us in turn, it means that we can Sell at the Bid price (because broker wish to Buy not higher than at Bid price) and we can Buy at the Ask price (because broker wishes to Sell not lower than at Ask price).​

    TASK #1

    Commander in Pips: Assume that your trading account is in USD. You intend to Buy USD/JPY in the amount of 1 standard lot. Currently you see these numbers on the broker’s quote board: USD/JPY 82.52/82.54.

    After some time, you see that you have some profit on your position and decide to close this trade. In this moment the rate has changed and you see such numbers: USD/JPY 83.38/83.40

    Calculate result from this trade, taking into account a Bid/Ask spread.

    1. In first part of trade we intend to Buy 100 000 USD for JPY. As we’ve talked we have to buy at Ask price, that stands second (after slash “/”) – 82.54.

    2. To close the trade we have to make reverse transaction, i.e. Sell USD/JPY. We have to do it at Bid price that stands first (before slash “/”) – 83.38.

    3. So, result in pips will be: 83.38-82.54 = 0.84 pips.

    4. Now, we have to convert it in our deposit currency, that is also Base currency, applying the formula that we’ve discussed previously:

    pip/exchange rate=0.84/83.38 = 0.0101

    5. All that we left to do is to multiply profit in pips of Base currency for lot size = 0.0101*100 000 = $1010. Nice profit, by the way. ​
    #1 Sive Morten, Dec 15, 2013
    Last edited: Dec 15, 2013
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