Lots in Forex
In the past, spot forex was only traded in specific amounts called a lot, or basically, the number of units of the currency you will buy or sell.
The standard lot size is 100,000 units of currency, and now, there are also mini, microand nano lot sizes that are 10,000, 1,000, and 100 units.
|MUCH||NUMBER OF UNITS OF|
Some brokers indicate the number of “many”, while other brokers to show the true units of the currency. As you already know, the change in the value of the currency relative to another is measured in “pips” that is a very, very small percentage of a unit the value of the currency.
To take advantage of this moment of change in its value, it is necessary to negotiate large amounts of a particular currency in order to see any significant profit or loss.
Suppose you will be using a 100,000 unit (standard) lot size. Let us now calculate some examples to see how it affects the value of a pip.
- USD/JPY at an exchange rate of 119.80: (.01 / 119.80) x 100,000 = $8.34 per pip
- USD/CHF at an exchange rate of 1.4555: (.0001 / 1.4555) x 100,000 = $6.87 per pip
In cases in which the U.S. dollar is not quoted first, the formula is a little different.
- EUR/USD at an exchange rate of 1.1930: (.0001 / 1.1930) X 100,000 = 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip
- GBP/USD at an exchange rate of 1.8040: (.0001 / 1.8040) x 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip.
Here are some examples of pip values for the EUR/USD and USD/JPY, depending on the size of the batch.
|PAIR||THE CLOSING PRICE OF||PIP VALUE PER:|
|Unit||Standard lot||Mini lot||Micro Lot||Nano much|
|USD/JPY||1 USD = 80 JPY||$0.000125||$12.5||$1.25||$0.125||$0.0125|
Your agent may have a different convention for calculating pip values relative to lot size, but in any way that they do, they will be able to tell you what the pip value is the currency that you are trading at that particular time.
In other words, they do all the match calculations for you!
As the market moves, so will the pip value depending on what currency that is traded.
What the heck is leverage?
You are probably wondering how a small investor like you can trade large amounts of money.
Think of your broker as a bank who basically fronts you $100,000 to buy currencies.
All the bank asks from you is that you give $1,000 as a good faith deposit, which will be carried out by you, but not necessarily to keep.
It sounds too good to be true? This is how forex trading using leverage works.
The amount of leverage you use will depend on your broker and what you feel comfortable with.
Normally the agent will require a deposit, also known as “margin”.
Once you have deposited your money, then you will be able to trade. The broker will also specify how much margin is required for the position (lot) traded.For example, if the allowed leverage is 100:1 (or 1% of the position), and that I wanted to change a position worth $100,000, but you only have $5,000 in your account.
There is No problem as your broker would set aside $1,000 in a deposit and allow you to “borrow” the rest.
Of course, any losses or gains will be deducted or added to the balance remaining in your account.
The minimum security (margin) for each of the lots vary from agent to agent.
In the example above, the broker required a one percent margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit on the position.
Let’s say you want to buy 1 standard lot (100,000) of USD/JPY. If your account is allowed 100:1 leverage, you will have to put up $1,000 as margin.
The $1000 that is NOT a rate, it is a deposit.
You get it back when you close the trade.
The reason that the broker requires the posting is that while the trade is open, there is the risk that you could lose money on the position!
Assuming that this USD/JPY trade is the only position that has been open in your account, you will need to maintain its capital account (absolute value of your trading account) of at least $1,000 at all times in order to keep the trade open.
If the USD/JPY plummets and your trading losses because of his capital account to fall below $1,000, the broker’s system will automatically close your trade to prevent further losses.
This is a safety mechanism to prevent the balance of your account will negative.
How do I calculate profits and losses?
So now that you know how to calculate the pip value and leverage, let’s look at how you calculate your profit or loss.
We’re going to buy dollars and sell Swiss francs.
- The rate you are quoted is 1.4525 / 1.4530. Because you are buying u.s. dollars you will be working on the “ASK” price of 1.4530, the speed at which traders are willing to sell.
- So you buy 1 standard lot (100,000 units) at 1.4530.
- A couple of hours later, the price moves to 1.4550 and you decide to close your trade.
- The new quote for USD/CHF is 1.4550 / 1.4555. Since initially bought to open the trade, for close the trade, which should now sell to close the operation, so you must take the “BID” price of 1.4550. The price that traders are willing to buy in.
- The difference between 1.4530 and 1.4550 is .0020 or 20 pips.
- Using our formula from before, we now have (.0001/1.4550) x 100,000 = $6.87 per pip x 20 pips = $137.40
Remember, when you enter or exit a trade, you are subject to the spread in the bid/ask quote.
When you buy a currency, you are going to use the offer or sale price.
When you sell, you will use the BID price.