Lots and Lot Sizes
Do you remember the kiosk example given above? You were exchanging £100 for $240 at the rate of 2.4? If you did that every day, you wouldn’t make enough money worth trading for.
In the FX market, you normally trade in 100,000 lots. So in the example above, you’d give £100,000 in exchange for $240,000. This is known as trading one standard or regular lot.
100,000 = 1 standard or regular lot (1 contract)
Don’t worry; you won’t have to provide that amount of money.
Let’s say £1 equals $2.0400, then 1 lot (or 1 contract) of £100,000 should be worth $240,000 and a fluctuation of 0.0001 (1 pip) should be worth 100,000 x 0.0001 = $10
Therefore, a 1 pip move is equal to $10
Here is the formula if you want to calculate the pip value for a given currency.
1 pip, with proper decimal placement / currency exchange rate x Lot Size
Here is an example using EURUSD:
(.0001/1.4096) x EUR 100,000 = EUR 7.09
But we want the pip value in USD, so we then must multiply EUR 7.09 by the EUR/USD exchange rate. So 7.09 x 1.4096 = $10.
You will find that the pip value = $10 with any currency in which the first currency quoted under
Cur1 (such as EURUSD, GBPUSD, or AUDUSD) is not the USD but the second currency (Cur2) is. The pip value is always $10.00 per 100,000 currency units. So $10 is the fixed value for 1 pip when dealing with the US Dollar as the 2nd currency in the pair.
Here is an example including the Japanese Yen:
USDJPY: Current Price (exchange rate) = 114.70
(.01/114.70) x USD 100,000 = $8.718
So a 1 pip move when trading the USDJPY pair will yield a profit or loss of $8.718.
Don’t worry if you don’t understand this right now as you don’t really need to know it. There are many calculators online which will help you with pip values. Almost all brokers will work this out for you anyway. For now, just remember that trading the Euro or the Pound against the US Dollar and trading 1 standard lot will give a $10 profit or loss. To do this, you need a regular trading account with a Forex broker.
If you trade the EURUSD or the GBPUSD more than any other, you’ll always gain or lose $10 per pip.
If you trade the USDCHF or the USDJPY, you’ll average about $8 per pip because the pip value changes as these currencies fluctuate.
You can also trade 10,000 lot sizes. A 10,000 lot is a fraction (a tenth) of a regular lot (100,000).
Trading with this amount is known as trading a mini lot. Each pip on the Euro, Pound etc… is worth $1 when trading a mini lot. For e.g. if you were to trade a lot size of 30,000, each pip would be worth $3 and you would be trading 3 mini lots at a time. You need a mini account with a Forex broker to trade mini lots.
However, some brokers offer accounts which are combined. This means you can trade regular lots as well as mini lots.
posted by Forex 1 million is possible @ 5:48 PM
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