Knowing the basics of forex is one thing, but properly measuring a trade size when trading is a very important success factor for new and experienced traders.
What is A Lot in Forex?
A: Lot is the measurement for the units of currency you buy and sell. A standard lot represents 100,000 units of any currency, whereas a mini-lot represents 10,000 and a micro-lot represents 1,000 units of any currency.
Let’s assume, you open a one-lot position, then your trade size equals 100,000 units of the base currency. Now in order to calculate the value of each unit of currency that you are trading, whether be a sell or a buy, in order to calculate the total value of your one lot trade, you need to know the “Pip” value.
The change in one currency value relative to another is measured in “pips,” and the impact of the pip value on your capital is related to the amount of the lot that you trade. For example, a one-pip movement for a standard lot corresponds with a $10 change. Whereas, one pip movement for a mini and micro lot is $1 and $0.1 respectively.
- A: Standard Lot: is 100,000 Units in Base Currency
- A: Mini Lot: is 10,000 Units in Base Currency
- A: Micro Lot: is 1,000 Units in Base Currency
What is a pip?
A pip is the standardized unit and is the smallest amount by which a currency quote can change. It is usually 0.0001 for US dollar related currency pairs, and 0.01 for Japanese yen related currency pairs since they go out to two decimal places. For example, if the exchange rate of EURUSD rises from 1.1343 to 1.1345, that 0.0002 rise in the value equals two pips.
On the other hand, since the Japanese yen pairs go out to two decimal places, the second decimal 0.01 is considered a pip. For example, if the USDJPY exchange rate rises from 109.74 to 110.74, then it is said that USDJPY has climbed by 100 pips.
To illustrate it better, let’s assume that we have a USDCAD quote of 1.3262. As it was discussed before, what this quote tells us is that for 1 US dollar, you can receive about 1.3262 Canadian dollars. If there was a ten-pip increase in this quote (to 1.3272), the value of the US dollar would rise relative to the Canadian dollar, as now 1 US dollar would allow you to receive slightly more Canadian dollars, which in this example would be equal to 1.3272 or to put it differently, now one Canadian dollar would give you less US dollar (1/1.3272=0.7534 USD).
:USD/CAD = 1.3262
1 USD = 1.3262 CAD
1 CAD = 0.7540 USD (Simply flip USDCAD to CADUSD by dividing 1 over 1.3262)
USDCAD= 1.3272 (+10 pips)
1 USD = 1.3272 CAD
1 CAD = 0.7534 USD
The effect that a ten-pip change has on the amount of base currency purchased, or of the pip value itself, depends on the units of base currency purchased. For example, if a trader buys one standard lot (100,000 units) of US dollar with Canadian dollar or similarly, buy one lot of USDCAD, the price paid will be 132,620 Canadian dollars ([1.3262] x 100,000) assuming the exchange rate for USDCAD is 1.3262.
If the exchange rate for this pair experiences a ten-pip increase, and then the trader decides to conduct the same transaction, the price paid now would be 132,720 Canadian dollars ([1.3272] x 100,000) for the same one lot purchase of US dollars.
In this case, due to a ten-pip rise in the exchange rate of USDCAD, you have to pay 100 Canadian dollars (132,720-132,620) more to receive the same one lot of the US dollar. The pip value on a one-lot purchase of USD/CAD will be Can$ 10 per pip (100/10), which equals to US$ 7.53 per pip.
Therefore, if the trader executed a one-lot buy earlier before the ten pip rise in the exchange rate, he would have saved 100 Canadian dollars. However, if he decided to execute a one-lot buy after the ten-pip rise he would have paid 100 Canadian dollars more for receiving the same one lot US dollar.
Now if we assume the trader decides to sell a one-lot USDCAD, it means that he or she is selling one lot of US dollars and receiving Canadian dollars. Therefore, assuming the exchange rate remains the same as the example above, 132,620 Canadian dollars will be received for the sale of one lot or 100,000 US dollars.
However, if the same scenario happens and the exchange rate jumps by a ten-pip, then the trader decides to sell USDCAD, he will receive 132,720 Canadian dollars for one-lot US dollar. Now if the trader buys or sells a mini lot (10,000) instead of a full lot of US dollars, a pip value would have been Cad$ 1 or US$ 0.75 for a mini lot transaction. Therefore, the pip value increases depending on the amount of the underlying currency (in this case US dollar) purchased.
Pips, Points, and Pipettes
Most forex brokers use a 5-decimal quotation system on pairs like the GBPUSD, EURUSD, USDCAD, etc. The fifth decimal place denotes 0.1 or 1/10 of a pip, which is also called a pipette or a point.
How to Calculate the Pip Value?
Calculating the pip value can be confusing. As it was discussed in the previous topic, a pip is a unit of measurement for currency movement and is the fourth decimal place (0.0001) in most currency pairs. For instance, if the GBPUSD moves from 1.2972 to 1.2973, that’s considered a one pip movement.
As a trader, it is crucial to know how much of a profit or loss a pip movement generates on a particular currency pair that you are trading then that can help to calculate the risk exposure of each trade precisely.
Learn how to calculate Pip value when your trading account currency is in US dollars
If your trading account currency is in USD, calculating the pip value is straight forward. Simply, when the USD is listed second in a pair the pip value is fixed and does not change, the fixed pip amount is:
- $0.10 for a micro lot (1,000)
- $1 for a mini lot (10,000)
- $10 for a standard lot (100,000)
Let’s take a look at the example below to illustrate how to calculate the value of 1 Pip for one standard lot of EURUSD, where the base currency of the account is in USD.
- 1 standard lot (100,000) x 0.0001 (1 pip move) = $10
The pip will be valued in the “counter currency” of the pair. Therefore, the above-fixed pip calculations apply to any pair, where the USD is listed as counter currency, such as; EURUSD, GBPUSD, AUDUSD, NZDUSD.
For all these pairs where the USD is listed second, a pip value equals $1 for a mini lot, 0.1 for a micro lot, and 10 for a standard lot. However, if the USD isn’t listed second, then divide the fixed pip value by the USDXXX rate to get the pip value in the US dollar.
For example, to get the pip value of USDCAD for a mini lot, divide “1” by the USD/CAD rate to get the pip value in US dollars. Or to put it differently, you can move the USD to the counter currency by flipping the pair to CADUSD following the same formula.
Formula: 1 / 1.3264 = $0.75
The result is $0.75, which is the pip value of USDCAD in the US dollar.
For a standard lot, you can do the same
Formula: 10 / 1.3264 = $7.5
Learn how to calculate Pip value when your trading account currency is not in the US dollar
Whatever currency the account is, if it is listed second in a pair, the pip values are fixed. For example, if your account capital is in Euro, any pair that has Euro as the counter currency (second currency) will have a fixed pip value.
- €0.10 for a micro lot is 1,000 worth of currency
- €1 for a mini lot which is 10,000 worth of currency
- €10 for a standard lot which is 100,000 worth of currency
And to find out the pip value when the Euro is the base currency, simply divide the fixed pip value by the EURXXX exchange rate to get the pip value in Euro. For example, to find the pip value of EUR/GBP for a mini lot, divide 1 (the fixed pip value) by the EURGBP exchange rate to get the pip value in Euro. However, for all the JPY related pairs, because they are quoted out to two decimal places, just follow the normal calculation and multiply the result by 10.
For example, if the EURJPY is priced at 124.61, to find out the standard pip value divide ¥10 by 124.61, then multiply the result by 10 and the pip value will be €0.8.
Not all currency pairs include your trading account currency. You may have a USD account, but want to trade the NZDCHF. The counter currency pip value is always fixed if you had an account in that currency. For example, if your trading account was in Swiss Franc, the standard pip value of NZDCHF would have been CHF10, but since your trading account is in USD, simply convert the CHF10 to your own account currency.
Formula: CHF10 x USD/CHF rate