Hello Traders, I'm Luke from disciplined trader.
This video is part of the trading basics series and in this one we will be looking at understanding
the market price.
So this will include how to read the price, how to measure price movements and what a
price spread is.
So you may have already seen some price quotes for different markets on the news or your
broker platform if you already have one.
You may have noticed that these prices are usually quoted to a number of decimal places
depending on which market you are looking at.
However, it can be difficult to understand what this price actually means.
Take the forex markets for example.
If you are looking at the GBP/USD and the price is 1.2000, it may not be completely
obvious what this price means.
To understand the price you have to know which currency is the base currency in this quote.
The price of a forex pair is always quoted against a single unit of the base currency.
And it is always the first currency in the quote.
Up - - So if we look at our GBP/USD example again with a price of 1.2000, we now know
that the GBP is the base currency so £1 buys $1.20.
If the price moves up, this means that £1 will buy more dollars than it previously did,
and if the price moves down, £1 will buy less dollars than it previously did.
Understanding the price of other markets such as indices, commodities or shares is easier
to grasp as the price is specific to only one product rather than a pair.
Take the Gold market for example.
If the price quoted is 1200, then that's all you need to know.
If that price moves up, then Gold has gone up in value and it the price drops, then Gold
has fallen in value.
Lets move on to measuring the movement of price and this can be trickier than first
expected.
Typically we measure price changes in pips, points and ticks.
You may have heard other traders say something like "the Euro/Dollar fell 100 pips yesterday"
or "the FTSE100 is up 100 points today" or "if the dow ticks down then I'm out"
and wondered what they meant.
Pips, points and ticks are simply measures of price movement within a market however,
understanding how much movement is equal to one pip, point or tick can be confusing.
Lets again look at the forex market and back to our GBP/USD example.
The price quote for this market is 1.2000.
A one pip increase in this market would change the price to 1.2001.
A 10 pip increase would change the price to 1.2010 and a 100 pip increase would change
the price to 1.2100 and so on.
When looking at forex pairs, a pip increase or decrease is usually shown on the fourth
decimal place.
There are a few exceptions to this such as the JPY pairs where a pip change is shown
on the second decimal place.
To make things a little easier, brokers tend to display the quote in such a way to make
the decimal place of interest more prominent than the others.
They do this by making the decimal place of interest a slightly larger font that the other
digits so it's obvious to the reader which number is representing the pip changes.
However, to make things just a little more confusing, you will now often see price quotes
to a fifth decimal place as brokers have started quoting prices to the 10th of a pip.
However, brokers do tend to make this decimal place very small to denote it's small significance.
Also, you will find that you quickly become familiar with how all the different price
quotes work when you start looking at them more frequently.
The terms pips and points are used synonymously with the term 'pips' only really been
used within the forex markets and the term points' used in the majority of the rest.
But "Why do I care how many pips or points a market has moved?" you may be thinking.
Well if you are spread betting (and most new traders will be) you enter positions as a
bet per pip or point.
So for example, if you are spread betting and buy the GBP/USD at a position size of
£1 per pip, then for every pip the price of that markets moves up, your position will
increase in profit by £1 also.
Ticks however refer to the smallest price movement a market can make.
As I said earlier, brokers have started quoting market prices to the 10th of a pip or point,
so a one unit change to the to the digit furthest right of the decimal place would represent
a one tick move.
This term is used less frequently by traders as a one tick movement is usually pretty insignificant.
The last thing I want to cover in this video is price spreads.
When viewing a market on a trading platform you will notice that there is a bid and a
ask price (or a sell and a buy price).
These prices will be slightly different from each other, with the buy price being slightly
higher than the sell price.
The price in the middle of these two prices is called the mid-price and it's this price
that is often quoted on the news channels and articles etc.
The difference between these two prices is what's known as a price spread.
The spread is essentially the commission you pay the broker when you place a trade.
Brokers will usually advertise their spreads across the different markets on their websites
and such so you have an idea of what you are likely to pay in spreads depending on which
markets you trade.
Spreads can also vary throughout the day depending on the market volatility among other things.
News announcements for example can send markets rocketing one direction and then the other
very quickly and brokers will often widen their spreads in such circumstances so this
is something to be aware of if trading around these events.
Let's look at a quick example of how a spread works.
Lets go back to our GBP/USD example, and the mid price the broker is quoting is 1.2000.
They offer a 2 pip spread on this market so the sell price is 1.1999 and the buy price
is 1.2001.
If the price were to move up five points, the sell price would become 1.2004 and the
buy price would be 1.2006.
As you may have noticed, if you were to buy the market at 1.2006 and sell it straight
away before the price moves at 1.2004, the only money you would lose is the cost of the
spread (1.2006 - 1.2004 = 2 pips).
Now lets say that a high impact news announcement has just been made like the non farm payrolls
in the US for example.
These kind of news announcements usually greatly increase the market volatility so the broker
will widen the spreads on the effected markets as it becomes difficult for them to keep up
with all the trading activity.
So the price of the GBP/USD may go to something like 1.1990 to sell and 1.2010 to buy meaning
there is a 20 pip spread on this market.
For a lot of day traders, a 20 pip spread will make it very difficult to enter but the
initial news hype dies down quite quickly usually and the spreads quickly return to
their normal price but it is definitely something to be aware of.
So that wraps up this video on understanding market price, I hope you have found it useful.
If you enjoyed the video, please feel free to drop a like on it.
If you have any questions or want me to cover any other topics in future videos, please
let me know in the comments below.
Also subscribe to the channel for more videos like this one.
I will be continuing this trading basics series to provide new traders with all the knowledge
they need to get started.
Thank you very much for watching and I hope you all have a good trading week.