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Welcome to the World of Currencies

CurrenciesAppreciation and Depreciation

Changes in the rate are expressed as appreciation or depreciation of one currency in terms of the other currency It is also referred to as strengthening or weakening of once currency vis-a-vis the other

Let’s look at an example:1 USD = INR 40Something costing 100$ will cost Rs.4000/-1 USD = INR 45Something costing 100$ will now cost Rs.4500/-A Bigger value of the exchange rate means that our purchasing power is lower; it is a depreciation of the Rupee and appreciation of the dollar

Let’s look at another example:1 USD = INR 45Something costing 100$ will cost Rs.4500/-1 USD = INR 40Something costing 100$ will now cost Rs.4000/-A Lower value of the exchange rate means that our purchasing power is higher; it is an appreciation of the Rupee or you can say the Rupee has strengthened and a depreciation of the Dollar or the Dollar has depreciated

The “bid” is the price at which you can sell the base currencyThe “offer” is the price at which you can buy the base currencyUSD/INR49.2225/49.2275OFFER / ASKBID

Bids and Offers are always for the Base currencyTraders always think in terms of how much it costs to buy or sell the base currencyOn the trading screen, you’ll see two prices for each currency pair. The price on the left-hand side is called the bid and the price on the right-hand side is called the offer (some call this the ask)

Let’s look at an example:The quote for the Dollar Rupee might be as follows:USD/INR49.2225/75Here the bid price is 49.2225 per Dollar and the offer price is 49.2275 per DollarUsually a market maker will simply give the quote as 25/75

The price quotation of each bid and offer you see will have two components:Let’s look at an example:The quote for the Dollar Rupee might be as follows:USD/INR49.2225/75In the above example - the Big figure is 49.22 and the dealing price is 25/75

USD/INR49.2225/49.22750.0050SpreadSpread is the difference between the bid and the ask

Calculating profit and loss using pipsThe last decimal place is called the pip. For most currencies, bids and offers are presented to the fourth decimal place that is 1/10000th of the terms currency unit also called as pipProfit-and-loss calculations are pretty straightforward in terms of math — they’re all based on position size and the number of pips you make or lose. A pip is the smallest increment of price fluctuation in currency prices. Pips can also be referred to as points; we use the two terms interchangeably

Let’s look at some currency quotes to understand pip betterUSD/CHF = 1.2267USD/EUR = 1.3225In the USD/CHF if the price moves from 1.2267 to 1.2287, it has gone up by 20 pips. If it goes from 1.2267 to 1.2253, it has gone down by 14 points

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Basics of Currency Trading

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