Tag: STP

Categories
Forex Assets

Understanding The EUR/JPY Asset Class

Introduction

Introduction

Introduction

The Euro area’s euro against the Japanese yen, in short, is termed as EURJPY. This pair, too, like the EURCHF, EURNZD, EURCAD, EURGBP, etc. is a minor or cross currency pair. It is one of the most traded currency pairs in the forex market. Here, the EUR is the base currency, and JPY is the quote currency. The value of this pair is quoted in terms of the quote currency.

Understanding EUR/JPY

This currency pair is precisely quoted as 1 EUR per X JPY. In simple terms, the value determines the units of the quote currency (JPY) required to buy one unit of the base currency (EUR). For example, if the market value of EURJPY is 121.00, it basically means that these many yen are required to purchase one euro.

EUR/JPY Specification

Spread

Spread is the difference between the bid price and the ask price set by the broker. This value is not constant and varies from broker to broker. It also varies on the type of account model.

Spread on ECN model: 0.6

Spread on STP model: 1.5

Fees

Spread is not the only way through which brokers generate their revenue. They charge some fee (commission) on each trade as well. Fees again vary from broker to broker and account model. Typically, there is no fee on an STP account. However, there are a few pips or fees on an ECN account as their spread is lesser than an STP account.

Slippage

Slippage is the difference between the trader’s asked price and the actual price given to him. Two factors majorly affect slippage on a trade; one, the volatility of the market, and two, broker’s execution speed. The slippage is usually within 0.5 to 5 pips. For major currencies, the slippage is much lower.

Trading Range in EUR/JPY

The trading range is the illustration of the minimum, average, and the maximum number of the pips the currency pair has moved in a given time frame. These values help assess the profit/loss potential of a trade. For instance, if the max volatility on the 1H is 10 pips, then one can expect to win or lose a maximum of $92 (10 pip x 9.20 value per pip) in an hour or two.

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can determine an extensive period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

EUR/JPY Cost as a Percent of the Trading Range

In addition to assessing the profit/loss in a timeframe ahead of time, we can use these values in determining the cost variation in different timeframes and volatility as well. The cost as a percent of the trading range tells the min, average, max costs by considering the timeframes and volatility as its variables.

ECN Model Account 

Spread = 0.6 | Slippage = 2 | Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 0.6 + 1 = 3.6

STP Model Account

Spread = 1.5 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.5 + 0 = 3.5

The Ideal way to trade the EUR/JPY

Above are the costs of each trade in terms of percentages. Note that they do not represent the actual cost on trade in terms of dollars, but are magnitude values which can be used for comparing with other values. The higher the magnitude of the percentage, the higher is the cost on the trade for that particular timeframe and volatility. From the tables, it can be ascertained that the values are highest on the min column and lowest on the max column. This, in turn, implies that the costs are higher when the volatility is low and vice versa. Talking about the timeframe, the costs are high on the lower timeframes and low on the higher timeframes. So, a day trader may preferably trade on the 2H/4H when the volatility is around the average values. And long-term traders may trade the 1W/1M whatsoever be the volatility of the market.

Furthermore, a trader may reduce their costs by entering and exiting trades using limit order instead of market orders. This will completely erase the slippage on the trade. An example of the same is given below.

Total cost = Spread + trading fee = 0.6 +1 = 1.6

Categories
Forex Assets

Everything About EUR/CAD Currency Pair

Introduction EURCAD is the abbreviation for the currency pair Euro area’s euro and the Canadian dollar. This is a cross-currency pair, as it does not involve the US dollar. In EURCAD, EUR is the base currency, and CAD is the quote currency. The price of this pair basically tells the value of CAD w.r.t EUR. […]

Introduction EURCAD is the abbreviation for the currency pair Euro area’s euro and the Canadian dollar. This is a cross-currency pair, as it does not involve the US dollar. In EURCAD, EUR is the base currency, and CAD is the quote currency. The price of this pair basically tells the value of CAD w.r.t EUR. […]

Introduction

EURCAD is the abbreviation for the currency pair Euro area’s euro and the Canadian dollar. This is a cross-currency pair, as it does not involve the US dollar. In EURCAD, EUR is the base currency, and CAD is the quote currency. The price of this pair basically tells the value of CAD w.r.t EUR.

Understanding EUR/CAD

The current market price of EURCAD determines the required Canadian dollars to purchase one euro. It is quoted as 1 EUR per X CAD. For example, if the CMP of EURCAD is 1.4700, it is as good as saying that 1.4700 CAD is needed to buy one EUR.

EUR/CAD Specification

Spread

The algebraic difference between the bid price and the ask price set by the broker is known as the spread. Spread varies from time to time and broker to broker. The approximate spread value on an ECN account is 0.8, and on an STP account is 1.8.

Fees

For every position that a trader opens, there is some fee associated with it. And it depends on the type of account model. It is seen that there is no fee on STP accounts and a few pips on ECN accounts.

Slippage

Slippage is terminology in trading, which, by definition, is the difference between the trader’s wished price and the real executed price. That is, the trader does not get the exact price he had intended for. There is some variation due to the volatility of the market and the broker’s execution speed. It usually varies from 0.5 to 5 pips on these minor currency pairs. The slippage is typically lesser on major currency pairs.

Trading Range in EUR/CAD

The trading range is an illustration of the minimum, average, and maximum pip movement in EURCAD. It determines the volatility of the market. The volatility of the market is a vital piece of information in trading, as one can assess the time that can be taken on each trade. And by applying more variables to it, one can determine the cost varies on the trade as well.

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

EUR/CAD Cost as a Percent of the Trading Range

Cost as a percent of the trading range is a simple yet very effective application of the above volatility table. There is a cost on every trade you take. The total cost of a trade is the sum of slippage, spread, and trading fee. This total cost is divided by the volatility values and is expressed in terms of a percentage. And the percentage values are used to figure out the best times of the day to enter and exit a trade with marginal cost.

ECN Model Account 

Spread = 0.8 | Slippage = 2 | Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 0.8 + 1 = 3.8

STP Model Account

Spread = 1.8 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.8 + 0 = 3.8

The Ideal way to trade the EUR/GBP

To determine the ideal way of trading the EURCAD, let us first comprehend what the percentage means.

High percentage => High cost

Low percentage => Low cost

Min column => Low volatility

Max column => High volatility

From the table, we can infer that the percentages are high in the min column and low for the max column. So,

Min column => High percentage

Thus, Low volatility => High cost

Max column => Low percentage

Thus, High volatility => Low cost

It is not ideal during low volatility as costs are high. Also, trading during high volatility is not a good idea as it is quite risky. Hence, to have a balance between both volatility and cost, it is ideal to trade when the pip movement on the currency pair is at the average values.

Another simple hack to reduce the costs is to trade using limit orders instead of market orders. Doing so, the slippage will be automatically cut off from the trade, and the total cost will significantly reduce.

Categories
Forex Assets

Asset Analysis – EUR/NZD Forex Currency Pair

Introduction

Introduction

Introduction

EURNZD is the abbreviation for the Euro area’s euro and the New Zealand dollar. It is classified under the minor/cross currency pairs. In EURNZD, EUR is the base currency pair, and NZD is the quote currency. As a matter of fact, in all currency pairs with euro in it, EUR is the base currency.

Understanding EUR/NZD

The value of this pair defines the New Zealand dollars required to purchase one euro. It is quoted as 1 EUR per X NZD. For example, if the value of value in the market is 1.6650, it implies that to buy one euro, the trader has to pay 1.6650 New Zealand dollars for it.

EUR/NZD Specification

Spread

Spread is a very popular term in the forex industry. This is the way through which the broker makes revenue. Spread is simply the difference between the bid price and the ask price. It differs from the type of account model. The spread on ECN and STP is given below.

ECN: 0.9 | STP: 1.7

Fees

For every position that a trader opens, there is some fee associated with it. And it depends on the type of account model. It is seen that there is no fee on STP accounts and a few pips on ECN accounts.

Slippage

Slippage is the difference between the price the trader had demanded and the actual price the trade was executed. Slippage happens when trades are taken using market orders. Slippage has a significant load on the total cost of the trade. More on this shall be discussed towards the end of this article.

Trading Range in EUR/NZD

A part of the analysis in trading is knowing the volatility of the market. Volatiltiy will give an close idea on the number of pips the currency pair will move in a given timeframe. The trading range depicts the minimum, average, and maximum pip movement in a specified time frame. Below are the values for EUNZD.

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

EUR/NZD Cost as a Percent of the Trading Range

Cost as a percent of the trading range represents the cost percentage that a trader is bearable for each trade they take. The percentage is obtained by finding the ratio between the total cost and volatility. With these percentage values, we come into the conclusion of the best time to enter and exit the market with minimal costs.

ECN Model Account 

Spread = 0.9 | Slippage = 2 | Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 0.9 + 1 = 3.9

STP Model Account

Spread = 1.7 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.7 + 0 = 3.7

The Ideal way to trade the EUR/NZD

By analyzing the percentages obtained above, we can find ways to reduce risk and cost on every trade of EURNZD. Firstly, the percentage tells the cost variation for different volatilities in different timeframes. The values are large in the first (Min) column. Meaning, the costs are high in the min column. Also, since this column represents low volatility, it implies that costs are high when the volatility is low and vice versa. In the average column, the costs are neither too high nor too low. And the volatility is under balance as well. Hence, this turns out to be the ideal time to trade in the market.

Moreover, another feasible technique to reduce cost is by placing limit orders. By the use of limit orders, a trader will eradicate the existence of slippage on the trade, and, in turn, reduce the total cost on the trade considerably. An example of the same is given below.

Comparing this table with the previous table, it is evident that the percentages have almost halved. Hence, entering and exiting trades using limit orders can prove to be very advantageous to reduce costs on trade.

Categories
Forex Assets

Understanding The EUR/AUD Forex Currency Pair

Introduction

Introduction

Introduction

EURAUD is a minor/cross currency pair traded in the forex market. EURAUD is the abbreviation for the euro area’s euro and the Australian dollar. The left currency, EUR is the base currency and the one on the right, AUD is the quote currency. The price of EURAUD basically tells the value of the Australian dollar.

Understanding EUR/AUD

The exchange rate of EURAUD shows the Australian dollars required to purchase one euro. It is quoted as 1EUR per X AUD. For example, if the value of EURAUD is 1.5995, it means that these many units of AUD are to be possessed by the trader to buy one unit of EUR.

EUR/AUD Specification

Spread

Spread is the way through which brokers make money. It is merely the difference between the bid price and the ask price set by the broker. These prices are often different from broker to broker. The spread differs based on the volatility of the market as well. The approximate spread on an ECN account and an STP account is given below.

ECN: 0.9 | STP: 1.7

Fees

For every trade a trader takes, there is some fee associated with it. And this fee is charged only by ECN type brokers. Typically, there is no fee on STP type brokers. The fee range is usually between 6 pips and 10 pips.

Slippage

A trader can place trades using either market order or using a limit order. In the case of market orders, the trader doesn’t get the exact price at which he executed the trade. The real price he received is different. This difference in the price is referred to as slippage.

Trading Range in EUR/AUD

As a professional trader, it is vital to know how many pips the currency pair moves in each timeframe. It gives the trader an idea of how long he must wait for his trade to perform. Traders can also assess their profit/loss in a given time frame. For example, if a trader takes a trade by analyzing the 1H timeframe, and the min market volatility is three pips, then he can expect to win or lose at least $20.91 (3 pips x $6.97 value per pip).

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

EUR/AUD Cost as a Percent of the Trading Range

Apart from knowing the potential profit/loss from the volatility of the market in different timeframes, one can also determine the cost variation by considering the volatility and the timeframe. For this, the ratio between total cost and volatility is taken into account. It is then expressed in terms of percentage. The magnitude of the percentage determines the cost of each trade.

ECN Model Account

Spread = 0.9 | Slippage = 2 | Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 0.9 + 1 = 3.9

STP Model Account

Spread = 1.6 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.7 + 0 = 3.7

The Ideal way to trade the EUR/AUD

Now that we’ve got the values from the above table, here is our ideal way to trade the EUR/AUD.

The higher the magnitude of the percentages, the higher is the cost of the trade on that particular timeframe. Comprehending this to the above table, it is seen that the percentages are highest and lowest on the min and max columns, respectively. This, in turn, implies that the costs are high when the volatility of the market is feeble. And the costs are low when the volatility is high. So, it is ideal to trade on any timeframe, given the volatility of the market is above average volatility. This will ensure the fairly high volatility with affordable costs.

Furthermore, the costs can be made much lower by placing limit orders instead of market orders because this will reduce the slippage on the trade to zero. As an example, the cost percentage table is given by ignoring the slippage value.

Thus, comparing the two tables, it is evident that the costs have reduced by 50%.

Categories
Forex Assets

What Should You Know About The EUR/CHF Forex Pair?

Introduction

Introduction

Introduction

EURCHF is the abbreviation for the Euro area’s euro and the Swiss franc. This currency pair is a minor/cross currency pair. Here, EUR is the base currency, and CHF is the quote currency. Trading the EURCHF is commonly called trading the ‘swissie.’

Understanding EUR/CHF

The value of EURCHF determines the number of units of Swiss francs required to purchase one euro. It is quoted as 1 euro per X francs. For example, if the value of 1.3000, it means that one must pay 1.3000 francs to buy one euro.

EUR/CHF Specification

Spread

Spreads are the way by which brokers make their money. There is a separate price to buy a currency pair and a separate price to sell it. To buy, one must refer to the ask price, and to sell, one must refer to the bid price of the currency pair. The difference between these two prices is known as the spread. This spread usually differs from account type. The average spread on ECN and STP model account are as follows:

ECN: 0.9 | STP: 1.6

Fees

The fee is nothing but the commission charged by the broker on a single trade. The fee also varies base on account type.

Fee on STP account: NIL

Fee on ECN account: 1 pip

Note: The fee depends from broker to broker. Here, we have taken the average value by referring to some brokers.

Slippage

Slippage in trading is the difference between the trader’s desired price and the real executed price by the broker. The slippage value depends on two factors:

  • Broker’s execution speed
  • Currency pair’s volatility

Trading Range in EUR/CHF

The trading range in EURCHF is the representation of the minimum, average, and maximum pip movement in different timeframes. These values can be used to assess one’s approximate profit or loss in a given time frame. For example, if the volatility on the 1H timeframe is five pips, then one can expect to be in a profit or loss of $50.25 (5 pips x $10.05 value per pip) in an hour or two.

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

EUR/CHF Cost as a Percent of the Trading Range

Apart from assessing your profit and loss, one can find the best time of the day to enter and exit a trade. For this, another table is inserted that represents costs in terms of percentage. And the magnitude of these percentages determines the range of costs on each trade.

ECN Model Account

Spread = 0.9 | Slippage = 2 | Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 0.9 + 1 = 3.9

STP Model Account

Spread = 1.6 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.6 + 0 = 3.6

Comprehending ‘Cost as a percentage of trading range’

Note that the mentioned percentages are a unitless quantity, and we consider only the magnitude of it. If the percentage value is high, then the costs are high. If they’re low, the costs are low too. Relating it to volatility, if the volatility is high, the costs are low and vice versa.

The Ideal way to trade the EUR/CHF

Now that we’ve comprehended what the cost percentages mean, let us determine the best times to trade the EURCHF currency pair. The minimum column of the table has the highest percentages, while the max column has the lowest percentages for each timeframe. It is neither ideal to trade when the volatility is high & costs are low nor when the volatility is low, and the costs are high. The only option left is the average column. The average column consists of the median values for both volatility and costs. Hence, this becomes the most suitable time to enter into this currency pair for trading.

Limit orders and their benefits

Traders usually enter and exit trades using market orders. This is the sole reason for slippage to take place. This has a significant weight on the cost of the trade. However, placing a limit order instead will nullify the slippage on the trade.

The difference in the ‘costs as a percentage of trading range’ when the slippage is made nil is illustrated below.

Categories
Forex Assets

What Should You Know About USD/CAD Forex Pair?

Introduction

Introduction

Introduction

USDCAD is the short form for the US dollar against the Canadian dollar. USDCAD, just like the EURUSD, GBPUSD, AUDUSD, etc. is a major currency pair. In this pair, the US dollar is the base currency, and the Canadian dollar is the quote currency. Trading this currency pair is known as trading the “loonie” because it is the name for the Canadian one-dollar coin.

Understanding USD/CAD

The exchange price of USD/CAD is basically the value of 1 USD in terms of CAD. It is quoted as 1 US dollar per X* Canadian dollars. For example, if the value of USDCAD is 1.3300, it means that it takes 1.3300 Canadian dollars to buy one US dollar.

*X is the current market price of USDCAD

USD/CAD Specification

Spread

The difference between the bid price and the ask price mentioned by the broker is the spread. Typically, this differs from the type of account.

Spread on ECN: 0.7

Spread on STP: 1.2

Fees

There is a fee (commission) on every trade a trader takes. This again depends on the type of account registered by the user. There is no fee on the STP account, but a few pips on an ECN account.

Note: We are considering fees in terms of pips, not currency units.

Slippage

Sometimes a trader is executed at a different price from what he had intended. This variation in price is known as slippage. Slippage takes place when orders are executed as a market type, and it depends on the volatility of the currency pair and also the execution speed of the broker.

Trading Range in USD/CAD

Trading analysis is not all about predicting when the prices will rise and fall. Sometimes, even though a trader knows the prices are going to rise/fall, it might not be ideal to jump on the trade without the knowledge of volatility of the market. Volatility range plays a major role in managing the total cost of a trade. Hence, it is vital to know the minimum, average, and maximum pip movement in each timeframe to assess the trading costs.

Below is a table that depicts the minimum, average, and maximum volatility (pip movement) on different timeframes.

USD/CAD PIP RANGES

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

USD/CAD Cost as a Percent of the Trading Range

With the min, average, and max pip movement, the cost range is calculated in terms of percentage. This percentage has no unit and determines if the width of the cost. That is, if the percentage is high, the cost is high for the trade, and if the percentage is low, the cost is low too.

Below are two tables representing the range of cost for an ECN account and an STP account.

ECN Model Account

Spread = 0.7 | Slippage = 2 | Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 0.7 + 1 = 3.7

STP Model Account

Spread = 1.2 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.2 + 0 = 3.2

The Ideal way to trade the USD/CAD

As mentioned earlier, the higher the percentage, the higher is the cost for a trade. Applying this idea to the above tables, it can clearly be inferred that the percentages are high on the minimum column. This means that the costs are high when the volatility of the currency pair is very feeble.

Similarly, the costs are considerably low when the volatility is quite high. However, this does not mean that trading during high volatility is the ideal way. This is because the volatility is quite risky to trade volatile markets. Therefore, one must trade during those times of day when the market volatility is around the mentioned average. The costs are decent enough, and the risk is maintained just fine.

Another point of consideration is that costs are reduced significantly when the slippage is made nil. This can be made possible by entering and exiting a trade by placing a pending/limit order instead of executing them by market.

Below is the same cost percentage table after making the slippage value to 0.

Now it is evident from the above table that slippage eats up a significant amount of cost on each trade. Hence, limit orders are the way to go.

Categories
Forex Course

38. Two Types of ‘No Dealing Desk’ Brokers

Introduction

Introduction

Introduction

In the previous lesson, we have discussed the two major classifications of forex brokers – Dealing Desk and No Dealing Desk. In this lesson, we will dig a little deeper and understand the types of No Dealing Desk brokers.

No Dealing Desk brokers can be classified into two types:

  • ECN brokers
  • STP brokers

What is an ECN broker?

An ECN broker is a forex broker expert that uses electronic communication networks to provide clients with direct access to other participants in the exchange market. Also, since these brokers consolidate prices from several other market participants, they usually offer their clients tighter bid/ask spreads. However, this tight spread is compensated by a small fixed commission charged by the brokers.

ECN brokers are NDD brokers, who do not pass the clients’ orders to market movers. Instead, they find participants in a trade electronically and then pass the orders to liquidity providers.

Understanding ECNs

As the name suggests, ECNs provide a network for buyers and sellers to participate and execute trades in the market electronically. These brokers make this possible by providing access to information on the orders being entered by the participants, and by facilitating the execution of these orders.

This network is designed to match the Buy and Sell orders currently traded in the exchange. And when the price requested by the client is not available, it provides the highest bid and lowest ask in the market.

What is an STP broker?

STP brokers, or Straight Through Processing brokers, are the ones who pass the clients’ orders directly to their liquidity providers. As discussed, the liquidity providers include banks, hedge funds, investment banks, etc. In this system, no intermediary or such will be involved in the execution of the order. Hence, the unavailability of the Dealing Desk makes the broker’s electronic trading platform Straight Through Processing (STP).

Moreover, with the absence of an intermediary (Dealing Desk), the brokers will be able to process orders of the clients much faster and without any delays.

Looking it the other way, STP brokers benefit from having many liquidity providers, because an increase in the number of liquidity providers increases the chances of the orders being filled for their clients.

Additionally, each time a client places a trade through an STP platform, the STP broker will make a profit. As STP brokers do not take the opposite of the clients’ trade, they add a minimal extra spread when quoting a bid/ask rate. And this small markup to the spread is passed to the clients via its electronic platform.

This completes the lesson on different types of No Dealing Desk brokers. Take the quiz below to know if you have got the concepts right.

[wp_quiz id=”54414″]
Categories
Forex Assets

Everything You Should Know To Trade The GBP/USD Forex Pair

Introduction

Introduction

Introduction

Currency pairs are classified as major, minor, exotic, etc. Major currencies pairs are those pairs that involve the US dollar as one of the currencies. These currencies typically have high liquidity and volatility. GBPUSD is one such example. It is the currency pair where Great Britain Pound is traded against the US dollar.

In this article, we shall be covering all the basic fundamentals which are essential to know before trading this pair. And before getting into the specifications of this pair, let us first understand what actually the price of GBPUSD signifies.

In GBPUSD, GBP is the base currency, and USD is the quote currency. The value (price) of the pair determines the units of USD required to purchase one unit of GBP. For example, if the current value of GBPUSD is 1.3100, then the trader must possess the US $1.3100 to buy 1 Pound.

GBP/USD Specification

Spread

Spread is simply the difference between the bid price and the ask price. The spread depends on the type of account.

Spread on ECN: 0.7

Spread on STP: 1.3

Fees

Again, the fee depends on the type of account. Typically, there is no fee charged by STP accounts. There is a trading fee on ECN account, which depends from broker to broker.

Slippage

Forex is very liquid and volatile. Hence, this causes slippage. Slippage is the difference between the price requested by the trader and the actual price the trader received. And this depends on the broker’s execution speed and volatility of the market. The slippage in major currency pairs is usually within 0.5 and 5 pips.

Trading Range in GBPUSD

As a trader, it is vital to know the number of pips a currency pair moves in a period of time. This is basically the volatility in the currency pair. And volatility is one of the factors which are helpful in risk management.

The volatility is measured in terms of percentage or pips. For example, if the volatility on the 1H timeframe of GBPUSD is 15 pips, then one can expect to gain or lose $150 (15 pip x $10 per pip) within a time period of few fours.

Below is a table that depicts the minimum, average, and maximum volatility (pip movement) on different timeframes.

EUR/USD PIP RANGES

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

(originally posted in our article here)

GBPUSD Cost as a Percent of the Trading Range

A Forex broker usually levies three type of charges for each trade. They are:

  • Slippage
  • Spread
  • Trading Fee

The sum of all the three costs will generate the total trading cost for one trade.

Total cost = Slippage + Spread + Trading Fee

Note: All costs are in terms of pips.

To bring up an application to the above volatility table, we bind these values with the total cost and find the cost variations (in terms of percentages) on different timeframes. And these percentages prove to be helpful in choosing the right timeframe with minimal costs.

ECN Model Account

Spread = 0.7 | Slippage = 2 | Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 0.7 + 1

Total cost = 3.7

STP Model Account

Spread = 1.3 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.3 + 0

Total cost = 3.3

The Ideal Timeframe to Trade GBPUSD

Above are tables that illustrate the cost ranges in terms of percentage. Let us now comprehend the tables and figure out the ideal timeframe to trade this currency pair. From the above table, it is evident that the cost is highest (74% and 66%) in the 1H timeframe when the volatility is low. Hence, it is not ideal to pick the 1H timeframe when the volatility is around 5 pips (minimum).

On the flip side of things, the cost percentages are minimal on the 1M timeframe. Traders with a long term perspective on the market can invest with minimum costs.

Intraday traders, on the other hand, can pick the 1H, 2H, 4H, or the 1D timeframe when the volatility of the market is above average.

Another point to consider is that slippage eats up the costs significantly. So, it is recommended to plan strategies that involve placing of limit orders and not market orders.

As proof, below is a table that clearly shows the reduction in the cost percentages when the slippage is made NIL.

Total cost = Slippage + Spread + Trading fee = 0 + 0.7 + 1

Total cost = 1.7

Comparing these values to the table with slippage=2, it can be ascertained that the cost percentage has reduced by a considerable amount. Hence, all in all, it is ideal to trade by placing limit orders rather than executing at the market price.

Categories
Forex Market

What Should You Know About Forex Brokers?

Introduction
In the previous article, we have discussed an overview of the financial industry. Now we know that the entire Forex market is about buying and selling of currencies. The

Introduction
In the previous article, we have discussed an overview of the financial industry. Now we know that the entire Forex market is about buying and selling of currencies. The

Introduction

In the previous article, we have discussed an overview of the financial industry. Now we know that the entire Forex market is about buying and selling of currencies. The majority of these foreign exchange transactions are done by major financial institutions and global organizations. But where do the retail traders like you and I undertake Forex trading? We do it through independent companies called brokers. In this article, let’s understand what a Forex broker is and the different types of Forex brokers existing in the market.

What is a Forex broker?

In the Forex market, buyers and sellers can be thousands of miles apart. So there needs to be a mechanism that matches their interest. This is where a Forex broker comes into the picture. A Forex broker is a platform where the buyers and sellers get to buy and sell currencies. It acts as a middleman between a trader and the market. In simple words, to find a buyer or seller for a particular currency, the broker matches your order with the respective buyer or seller. These brokers are also known as ‘liquidity providers.’

Types of Forex brokers

Even though all brokers in the Forex industry provide the same basic service, there is a difference in their functionality and mechanism. The first thing to look for with every Forex broker is whether they have a ‘dealing desk’ or not. In brokerage firms, the dealing desk refers to a team of traders who manage the broker’s inventory and hedging operations. Nowadays, most of the dealing desks consist of hundreds of traders and analysts.

Brokers that work on dealing desk operate in a closed environment wherein they set their own price rates. They fill their client orders by matching the buy and sell orders of their clients. When a broker uses a dealing desk, they are called as Market Makers.

Brokers that don’t use a dealing desk get rates from the interbank market and process their client orders by linking them directly to institutions, hedge funds, mutual funds, and other brokers. When a broker does not use a dealing desk, they are either known as ECN (Electronic Communication broker) or an STP (Straight Through Processing) broker.

Market Makers

Market Makers (MM) are called ‘dealers’ in the interbank market. They charge a variable spread instead of commission, which is why most of the time, they are accused of manipulating the spread and prices of the currency pairs. Theoretically, the spread should widen or narrow during high liquidity conditions, but MM brokers offer a fixed spread and compete based on the spread.

Electronic Communications Network (ECN) Broker

ECN brokers make their profits from spreads they charge on buy and sell rates or from fixed trade commission. The transactions here are mostly interbank. Because the spreads in the interbank markets are dynamic, ECN brokers prefer charging commissions rather than fixed spreads. This is one of the easiest ways to trade, but this requires a much higher investment capital as clients in the interbank markets only trade large lots. Therefore, trading with ECN brokers requires a minimum account balance of $1000. In addition, there is no guarantee that you will find a buyer or seller in the interbank market at your quoted price. ECN brokers sometimes won’t be able to execute orders at that price, so they issue a re-quote or simply reject the order. These are some of the limitations of ECN brokers.

Straight Through Processing (STP) brokers

Like ECN brokers, STP brokers, too, don’t have a dealing desk. But they use some of the practices of Market Maker brokers to provide flexibility to their clients. They display rates similar to the interbank market rates, and their first priority is to process trades directly in the interbank market, like an ECN broker. If the counterparty is not found, they start acting like a Market maker and match the order with their own client. The initial capital required to trade with this type of broker is relatively lesser compared to ECN brokers.

These are the different types of brokers in the market. So when you are choosing a broker, make sure to select the one that suits your trading style and capital available to trade.

Trading Platforms 

The ‘Market Makers’ provide trading platforms like Act Trader and MetaTrader since their orders are executed at the dealing desk. However, non-dealing desk type of brokers uses direct access trading platforms. They display prices directly from different liquidity providers. The platforms which are best suited for this requirement include Currenex Viking software and Level II software. The trading platform should be chosen in such a way that it suits your trading objectives. We hope this article helped you in deciding that. Let us know if you have any questions in the comments below. Cheers!