Tag: Forex Lots

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Beginners Forex Education Forex Basic Strategies

What Lot Sizes Should I Be Trading?

If you are a novice in the Forex market and you don’t know exactly what a lot on Forex is and what this is all about, in this article I will show you what it is and how to know what amount you should use or what amount in lots you should use in your […]

If you are a novice in the Forex market and you don’t know exactly what a lot on Forex is and what this is all about, in this article I will show you what it is and how to know what amount you should use or what amount in lots you should use in your […]

If you are a novice in the Forex market and you don’t know exactly what a lot on Forex is and what this is all about, in this article I will show you what it is and how to know what amount you should use or what amount in lots you should use in your case to trade on Forex.

What are Pips and Lots?

The first thing to understand is that pips and lots are two concepts in the currency market that are related when calculating gains or losses in a move that can make a quote for a currency pair.

The pips measure how much the currency varies and the lots measure how much you buy or sell from that currency crossing. That’s why the more you flow in pips and the greater what you’ve bought or sold the more it will affect your account.

How many units make up a Forex lot

When you trade in the currency market you do it as if it were in a pack. What does this really mean? A lot is 100,000 units, so if for example, you make a purchase in the pair EUR/USD of a lot, you are performing an operation worth 100,000 dollars. This type of trading can be done even with much less money in your account, as brokers offer leverage for it.

What is a Micro Lot and a Mini Lot?

You must be thinking that leverage and $100,000 doesn’t sound very good to start with. Definitely not. Therefore, it is possible to do it for the minimum possible and that is where the mini lots and micro-lots come in.

Mini lots are one-tenth of a lot, so if a lot is equal to 100,000 units, when you operate a mini lot in EUR/USD you do it for $10,000. Okay, this is something else, but what if I want to do it for less? Is it possible? Indeed, there is also the possibility of a micro lot, that is 1,000 units. Following the example above, 1,000 dollars.

How to Calculate the Value of a Forex Lot

Understood all these now I will explain how you can know the value of a lot in a currency and how it will affect your account every change that occurs in the price.

Step 1: Choose the currency pair. GBP/JPY.

Step 2: Calculate how much a pip is worth. In most cases, the pip at a crossover is the fourth decimal. In the crossings with JPY is the second (yes, I have put it on purpose for you to learn it well).

GBP/JPY is currently listed at 175,150

If GBP/JPY moves and its price goes to 175.170 there will be two pips varied (175.170 – 175.150).

How much is this variation in my account with a micro-lot?

1000 units * 0.02 = 20 yen.

Step 3: Calculation in your currency. How much does this mean if your account materialized in dollars? We just need to do a conversion by looking at the USD/JPY rate, which currently stands at 107,750. Thus, if one dollar is equivalent to 107,750 yen, 20 yen is equivalent to 0.18 euro.

That is, the change of two pips in our account implies a variation of 18 cents.

Can we give another example for the classic EUR/USD?

Step 1: we have it, EUR/USD.

Step 2: Suppose EUR/USD varies from 1.12500 to 1.2490.

We have mentioned above that in most pairs a pip supposes the minimum variation in the fourth decimal place. This is the case, a drop in the price of the pair of 10 pips or 1 pip.

If in this case, you have bought a mini lot (10,000 units):

0.0001* 10,000 =1 dollar per pip.

You’d be missing a dollar more commissions in this scenario.

Step 3: What if your account is in euros?

1/1.12500 = 0.88 euros. It would vary instead of one euro, 88 cents.

Just as we have calculated the value of one pip in this last case or two in the previous one, we can do it for 100 or 200 and so depending on the entry price and stop calculate what is the maximum you can lose or win in each operation. Easy, isn’t it?

Online Calculator

All right, Ruben. I have understood everything, but I find it a drag to have to be doing these calculations to be able to calculate the potential gains and losses in each operation. Relax, I have a solution for you, here you have a calculator where to do all this in a simple way.

Just choose the currency of account, the balance (use equity), the percentage that you are willing to risk, and stop-loss in the currency crossing you have chosen. From here the rest calculates as you will see automatically.

Commission Per Lot on Forex

You know how lots and pips work in the currency market. I have previously told you that brokers allow leverage so in Forex you will be able to move more amounts than you have in your account.

First, you should be very careful with all this talk. Leverage generates greater potential gains, but also potential losses that can end your account. Now, leveraging here in a controlled manner is another matter. Why does the broker allow you to beat yourself up and move more money than you actually have? Because he’s interested, that means more commissions for him. At times when there is more volume on the market, the more money you will receive for it. Even with all this, I have to tell you that competitive brokers allow you to move up to $100,000 by paying only $7 in commissions. The cost is relatively low for financing the operation.

I recommend that you practice all this in a demo account so that you do not have any doubts. The above calculation can help you do your calculations, but it’s OK to start doing it yourself manually and then check if it’s OK. Also, as you learn and progress my advice is that you can automate all this so there is no miscalculation. Remember that every failure here costs money.

In the end, you have already seen that this pips and lots is not at all complex, everything is in standing with attention to understanding how it works and making a couple of practical examples like these.

Categories
Forex Basics

What Does One Lot Represent in Forex Trading?

If you’re new to the forex trading world, you might find yourself scratching your head at some of the terminologies. Terms like leverage, broker, and pip often confuse beginners, but it’s easy to understand these terms if you spend time researching what they mean. Today, we will start by discussing the common trading term “lot”, […]

If you’re new to the forex trading world, you might find yourself scratching your head at some of the terminologies. Terms like leverage, broker, and pip often confuse beginners, but it’s easy to understand these terms if you spend time researching what they mean. Today, we will start by discussing the common trading term “lot”, […]

If you’re new to the forex trading world, you might find yourself scratching your head at some of the terminologies. Terms like leverage, broker, and pip often confuse beginners, but it’s easy to understand these terms if you spend time researching what they mean. Today, we will start by discussing the common trading term “lot”, which simply refers to the size of a trade or the amount that the trader is trading at any given time.

There are four different lot sizes: 

  • A Standard lot is equal to 100,000 units of the base currency
  • A Mini lot is equal to 10,000 units of the base currency or 10% of the standard lot
  • A Micro lot is equal to 1,000 units of the base currency or 1% of the standard lot
  • A Nano lot is equal to 1,000 units of the base currency or 0.1% of the standard lot

A standard lot is often considered to be the default lot size, but many brokers offer accounts that support the trading of mini and micro lots. It’s a bit harder to find an account that supports nano lots, although this isn’t impossible. 

For example: If you trade 1 lot (100,000 units) of AUDUSD, the size of your trade is equal to 100,000 units of the AUD currency.

What is a Pip? Understanding Pips and their Value

We mentioned the term “pip” earlier as another trading term that leaves many beginners feeling confused. A pip, also known as a percentage point, refers to the change in value between two different currencies. With the exception of yen pairs, a pip is typically 0.0001. With yen currencies, a pip is 0.01.

For example: If the value of EURUSD opens at 1.1465, and closes at 1.1475, the difference in value is 10 pips. 

Traders use this formula to calculate the value per pip: 

Pip value in Counter/Quote currency = (pip in decimal X 100,000)

If you’re still confused, you don’t have to worry about calculating pip value manually, as you can simply use a free pip value calculator online. It’s important to understand why pip value is needed because traders need to know about lots, pips, and pip value in order to calculate their profits and losses. In order to do so, you’ll use this formula:

Profit/Loss = Number of Pips x Value per Pip x Lot size

Example 1: You buy Euros at $1.2178 per Euro and sell at $1.2188 per Euro with a transaction size of 100,000 (one standard lot). In order to calculate your profit or loss, you’ll plug the numbers into the provided formula:

(1.2188 – 1.2178) X 100,000 = $100

In this example, we subtracted the buying price from the selling price and then multiplied by the transaction size of 100,000 (one standard lot). The result shows that there was a $100 profit from this transaction.

Example 2: You buy GBP at 1.8384 and sell at 1.8389 with a transaction size of 10,000 (one mini lot). You’ll then plug these numbers into the formula:

(1.8389 – 1.8384) X 10,000 = $5

In this example, the transaction produced a $5 profit. Note that we multiplied by 10,000 because the size of the transaction was one mini lot, while we multiplied by 100,000 in the first example because the size was one standard lot. 

Using a Position Size Calculator

As we mentioned earlier, you can find a free position size calculator online if you’d prefer to avoid manual calculations. A quick Google search for “forex position size calculator” will bring up several results. From there, you’ll just need to plug the details into the calculator and sit back while it does the work for you. 

 

Categories
Forex Basics

Pips and Lots: What They Are & How They Differ

In this article, we have to do some basic math. It is very likely that you have heard the terms “lot” and “pips” and if you’ve read about the Forex market. Below we will show you what they are and how they are calculated. Take the time to digest this information, as it is vital […]

In this article, we have to do some basic math. It is very likely that you have heard the terms “lot” and “pips” and if you’ve read about the Forex market. Below we will show you what they are and how they are calculated. Take the time to digest this information, as it is vital […]

In this article, we have to do some basic math. It is very likely that you have heard the terms “lot” and “pips” and if you’ve read about the Forex market. Below we will show you what they are and how they are calculated.

Take the time to digest this information, as it is vital knowledge that every Forex investor must learn and handle. Don’t even think about starting trading in Forex without being able to calculate the value of a pip and without being able to calculate gains and losses.

What is a Pip?

A pip is the smallest possible change in the value of a currency pair. If for example the EUR/USD pair moves from 1.3150 to 1.3151, that is 1 PIP. A pip is the last decimal place in the quotation. Through the pips, you will calculate the gains and losses. As each currency kept a value, is appropriate to calculate the value of a pip for each particular currency.

In pairs where the US dollar (USD) is the base currency, the calculation would be as follows:

Imagine the USD/JPY pair at a value of 119.80 (you will see that for this pair only two decimals are used, while the vast majority use four decimals).

For USD/JPY, 1 pip equals .01

By this, we mean:

USD/JPY:

119.80

.01 divided by quotation = value of a pip.

.01 / 119.80 = 0.0000834

May appear to be too small a number, but then we’ll see how everything is relative to the size of the lot.

USD/CHF:

1,5250

.0001 divided by quotation = value of pip.

.0001 / 1.5250 = 0.0000655

USD/CAD:

1,4890

.0001 divided by quotation = value of pip.

.0001 / 1.4890 = 0.00006715

In the case where the dollar (USD) is not the base currency, and we want to get the dollar value of a pip, an additional step will be required.

EUR/USD:

2200

.0001 divided by quotation = value of a pip.

Thus

.0001 / 1.2200 = EUR 0.00008176

But we want to know the value of the dollar, so do one more calculation…

EUR x Quote

Thus

0.00008196 x 1.2200 = 0.00009999

We’ll round it up to 0,0001.

GBP/USD

1.7975

.0001 divided by quotation = value of pip.

Thus

.0001 / 1.7965 = GBP 0.0000556

But we want to know the value of the dollar, so we do one more calculation…

GBP x Quote.

Thus

.0000556 x 1.7975 = 0.0000998

We rounded it up to 0,0001.

In the next section, we will find out how these numbers that might seem insignificant can have a big impact when investing in Forex.

What is One Batch?

In Forex it is operated in batches. The standard size of a batch is $100,000. There are also mini-batches that are $10,000. And there are even micro-lots of $1,000. As you’ve already learned, currencies are measured in pips, which are the minimum possible increase. To get any benefit out of these small increases, we need to trade large amounts of a particular currency in order to achieve any significant gain or loss.

Let’s assume we’re going to use a standard batch of $100,000. We’ll do some calculations to see how the value of a pip is affected.

USD/JPY at a rate of 119.90

(.01 / 119.80) x $100,000 = $8.343 per pip

USD/CHF at a rate of 1.4556

(.0001 / 1.4556) x $100,000 = $6.87 per pip

In the case where the dollar is first, the formula changes a little.

EUR/USD at a rate of 1.1920

(.0001 / 1.1920) x EUR 100K = EUR 8,38 x 1.1920 = $9.99735 and rounded to $10 per 1 pip.

GBP/USD at a rate of 1.8045

(.0001 / 1.8045) x GBP 100K

 = 5.54 x 1.8045 = 9.99416 and rounded to $10 per 1 pip.

Depending on the online broker we work with, they may have some different particularities when calculating the value of a pip relative to the size of a lot. But in any case, as long as market prices vary, so can the value of a pip vary according to the currency being used.

How Do I Calculate Profits and Losses?

We already know how to calculate the value of a pip, then let’s see how we can calculate our profits or losses.

Let’s take an example where we buy US dollars (USD) and sell Swiss Francs (CHF). Let’s imagine that the quote is at 1.4525/1.4530. As we are buying USD, we use the price of the ask, which is 1.4530. We bought 1 lot of $100,000 to 1,4530. A few hours later, the price went up to 1.4550 and it was decided to close the deal.

The new rate is 1,4545 /1,4550. Since we are closing the transaction and initially made a purchase to start the operation, we need to close the same transaction with a sale, with a price of 1.4545. The difference between 1.4520 and 1.4540 is .0020 or 20 pips.

Using our formula above, we calculated a gain of (.0001/1.4550) x $100,000 = $6.86 per pip x 20 pips = $137.40.

Remember that when you open a position, you are subject to the spread which is the difference between the bid/ask and is the commission that the brokers receive for executing the transaction. When buying, the ask price will be used, and when selling the bid price will be used.

What is Leverage?

We’ve already talked a little bit about leverage in the previous article (How do you make money in Forex?) but if you haven’t seen it yet, you’re probably wondering how a small investor like yourself could handle such large sums of money. Think of your Forex broker as a bank that lends you $100,000 to buy currencies but only asks for a $1000 deposit as a good-faith guarantee or guarantee to perform the transaction. This sounds too nice to be true, but that’s how leverage is used in the Forex currency market or in some other investment instruments.

The level of maximum leverage available to use depends on the broker you work with and can several from one investment instrument to another. Online brokers offering services to retail customers generally require a very small minimum initial deposit to open a trading account. Once you have deposited that money, you can trade on Forex. The broker will also tell you what margin you need to have available in your account as a guarantee to perform operations

For example, imagine that your broker offers you a leverage of 1:100. For every $1000 you have available in your account, you can open operations for 1 batch of $100,000. So if you have $5,000, you could manage a position of $500,000 (5 lots).

The margin for each lot (margin) may vary considerably from one broker to another. In the above example, the broker requires a margin of 1%. This means that for every $100,000 invested, the broker occupies a $1000 deposit as collateral.

What is a Margin Call?

In addition to the guarantee margin required to open a position, there is also a maintenance margin to keep your position open. In the event that the money in your trading account falls below the required margin requirements, the broker will close some of the positions you have open to put your balance sheet and account back within the required margin. This is a measure to prevent you from having a negative balance sheet and incurring debt. These measures to avoid negative balances are executed automatically according to the evolution of your positions, even in a highly volatile and fast environment like that of the Forex market.

Example #1

Suppose you open an account with $2000 and buy a lot of EUR/USD with a margin requirement of $1000. The margin you can use is the capital available to start new positions or manage losses. As started with $2000, the usable margin is $2000. But when you open a lot, which requires a $1000 margin, the margin available will now be $1000.

If your position goes into losses and those $1000 that remain free in your trading account do not cover the maintenance margin requirements the margin call or margin call will occur.

Example #2

Suppose you open a $10,000 Forex account. You trade 1 batch of EUR/USD, with a $1000 margin requirement. Remember that the available margin can be used to open new positions or to sustain the eventual losses of current open positions. Before opening the position, you would have a $10,000 margin available. Once you open the position, you have a $9000 usable margin.

Make sure you understand the difference between usable margin and the margin used. If your account balance falls below the usable margin due to losses, you will need to deposit more money or the broker will proceed to close the position to limit the risk to both you and them. As a result of this, you can never lose more than the amount you have deposited. It is vital to know the requirements regarding the online broker margin you will use and also feel comfortable with the risk you are taking in each transaction.