When it is about money it is good to know how to do well the accounts and mathematics is not an opinion. It is important to know well how to calculate what are the gains and losses in forex trading. The pip is the change in value of a currency. The lot is the traded value of Spot forex. We will learn how to calculate pips and lots according to traded currencies.
When you decide to implement a certain forex trading strategies you have to know what this strategy could lead calculating the gains or losses of the different scenarios.
Calculate the gain or loss is very simple, everything is based on the amount of the open position and the number of pips gained or lost.
The pips are considered critical when it comes to forex trading strategies for beginners and in this part of basic forex trading guides we will learn to understand what they are and how to calculate them.
Pip stands for Price Interest Point: the smallest price increment in a currency unit and it is expressed by the last decimal value of a currency pair. For example: EUR / USD rose from 1,1005 to 1,1006, the variation will be equal to one pip.
The value of a pip depends on the currency pair you are trading on: if you consider for example the USD / JPY whose price is expressed with two decimal places, the pip value will have two decimal places (0,01). For other currency pairs, such as EUR/USD, there will be four decimal places (0,0001).
Thus, the value of a pip can be fixed or variable depending on the currency pair. For example, for all currencies that are traded in dollars, the value of a pip is fixed and is always $ 10 for standard lots, $ 1 for mini-lots and $ 0,10 per so-called micro-lots.
What is a lot in Forex?
Spot Forex is traded in lots. Standard size for a lot is $ 100.000. There can be also a mini-lot of the size of $ 10.000 or a micro-lot of the size of $ 1.000. Being profits measured in pips, in order to see an interesting increase on your earnings, you need to trade large amounts of a particular currency.
We will do some examples to see how lot size affects the pip value. Suppose you are using a lot of $ 100.000.
USD / JPY have an exchange rate of 101,50 (two decimals)
(0,01 / 101,50) x € 100.000 = $ 9,85 per pip
In case the US dollar is not the numerator, the formula is slightly different.
EUR / USD have an exchange rate of 1,3420 (four decimals)
((0,0001 / 1,3420) x € 100.000) x 1,3420 = $ 10 per pip
Since the market is very volatile, the pip value depends on what you are currently trading. Every forex broker has his own method to calculate the value of the pip per lot, but he will be always able to give you the pip value for trading a currency at a given time.
After learning how to calculate the value of a pip per lot, let’s look how to calculate the profit or loss.
EUR/USD is quoted 1,3420 / 1,3425. Assuming that you are buying EURO, you will buy a lot of $ 100.000 at the exchange rate of 1,3425, the price at which traders are willing to sell.
A few hours later, however, the price goes to 1,3445 and you decide to close.
The new offer for EUR / USD is 1,3445 / 1,3450. The next step is to close the trade and the difference between 1,3425 and 1,3445 is 0,0020 or 20 pips.
Using our formula we have now: (0,0001/1,3445) x € 100.000 = $ 7,44 per pip
7,44 x 20 = $ 148,75 this is our profit.
Do not forget that you can buy one currency using the ask price and you can sell it using the bid price.
Then, when you buy a currency, you pay the spread when you enter but not when you leave. When you sell a currency, you do not pay the spread when you enter but only when you exit.