Forex trading, also known as foreign exchange trading, is the act of buying and selling currencies in the foreign exchange market. The foreign exchange market is the largest and most liquid financial market in the world, with an average daily turnover of over $5 trillion.
In Forex trading, traders aim to make a profit by buying low and selling high, or selling high and buying low. The profit or loss is determined by the difference between the buying and selling price, known as the spread.
One important concept in Forex trading is point size. Point size, also known as pip size, is the smallest increment by which a currency pair can change in value.
For most currency pairs, point size is equal to 0.0001 of the currency’s value. For example, if the EUR/USD currency pair is trading at 1.1200, a change to 1.1201 would represent a one-point increase, or a 0.0001 increase in value.
However, for currency pairs that include the Japanese yen (JPY), point size is equal to 0.01 of the currency’s value. For example, if the USD/JPY currency pair is trading at 107.50, a change to 107.51 would represent a one-point increase, or a 0.01 increase in value.
Point size is important because it determines the potential profit or loss for a trade. For example, if a trader buys 100,000 units of the EUR/USD currency pair at 1.1200 and sells it at 1.1201, the profit would be 10 points, or 0.0010 of the currency’s value.
To calculate the profit or loss for a trade, traders use the formula:
Profit/Loss = (Closing Price – Opening Price) x Point Size x Number of Units
For example, if a trader buys 100,000 units of the USD/JPY currency pair at 107.50 and sells it at 107.60, the profit would be:
(107.60 – 107.50) x 0.01 x 100,000 = $100
Point size is also important when calculating the risk and reward ratio for a trade. The risk and reward ratio is the ratio between the potential profit and the potential loss for a trade. For example, if a trader risks $100 on a trade with a potential profit of $200, the risk and reward ratio would be 1:2.
To calculate the risk and reward ratio, traders use the formula:
Risk/Reward Ratio = Potential Profit / Potential Loss
For example, if a trader buys 100,000 units of the EUR/USD currency pair at 1.1200 and sets a stop loss at 1.1180, the potential loss would be:
(1.1200 – 1.1180) x 0.0001 x 100,000 = $20
If the trader sets a take profit at 1.1300, the potential profit would be:
(1.1300 – 1.1200) x 0.0001 x 100,000 = $100
The risk and reward ratio would be:
Risk/Reward Ratio = 100 / 20 = 5:1
In conclusion, point size is an important concept in Forex trading. It determines the potential profit or loss for a trade, as well as the risk and reward ratio. Traders should be aware of the point size for the currency pairs they are trading, and use it to calculate their potential profits and losses.
