The Forex Spot Market
The
Spot Forex is traditionally traded in lots also referred to as contracts. The standard size for a lot is $100,000.
In the last few years a
mini lot size has been introduced of $10,000 and this again may change in the years to come. As we mentioned
previously
currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these tiny
increments it is
desirable to trade large amounts of a particular currency in order to see any significant profit or loss.
We shall
cover leverage later
but for the time being let's assume we will be using $100,000 lot size. We will now recalculate some examples to
see how it effects
the pip value per contract
For USD/JPY at an exchange rate of 116.73 the value per pip is
(.01/116.73) X $100,000 = $8.56 per pip
For
USD/CHF at an exchange rate of 1.4840
(0.0001/1.4840) X $100,000 = $6.73 per pip
In cases where the US Dollar is not quoted first you need to convert back to dollars using
an additional calculation.
For EUR/USD at an exchange rate of 0.9887 the value per pip is
(0.0001/ 0.9887) X EUR 100,000 = EUR 10.11
To get back to US Dollars is simply
EUR 10.11 X Exchange rate which looks like EUR 10.11 X 0.9887 = $9.9957 rounded up will be $10 per pip.
For
GBP/USD at an exchange rate of 1.5506 the value per pip is
(0.0001/1.5506) X GBP 100,000 = GBP 6.44
Again, to get back to US dollars per pip simply convert using the exchange rate
GBP 6.44 X Exchange rate GBP 6.44 X 1.5506 = $9.9858864 rounded up will be $10 per pip.
Your broker may have a different convention for calculating pip value relative to lot size but
however they do it
they will be able to tell you what the pip value is for the currency you are trading at that particular time.
Remember that as the
market moves so will the pip value depending on what currency you trade.
So now we know how to calculate pip value lets have a look at how you work out your profit or loss.
