Lot size / Contract size
In Forex, positions are quoted in terms of ‘lots’. The common
nomenclature is ‘standard lot’, ‘mini log’, ‘micro lot’, and ‘nano lot’;
we can see examples of each of these in the chart below and the number
of units they each represent:
• How to calculate pip value
You probably already know that currencies are measured in pips, and
one pip is the smallest increment of price movement that a currency can
move. To make money from these small increments of price movement, you
need to trade larger amounts of a particular currency in order to see
any significant gain (or loss). This is where leverage comes into play;
if you don’t understand leverage totally please go read Part 1 of the
course where we discuss it.
So we need to know now how lot size affects the value of one pip. Let’s work through a couple examples:
We will assume we are using standard lots, which control 100,000 units per lot. Let’s see how this affects pip value.
1) EUR/JPY at an exchange rate of 100.50 (.01 / 100.50) x 100,000 = $9.95 per pip
2) USD/CHF at an exchange rate of 0.9190 (.0001 / .9190) x 100,000 = $10.88 per pip
In currency pairs where the U.S. dollar is the quote currency, one
standard lot will always equal $10 per pip, one mini-lot will equal $1
per pip, one micro-lost will equal .10 cents per pip, and a nano-lot is
one penny per pip.
• How to calculate profit and loss
Now, let’s move on to calculating profit and loss:
Let’s use a pair without the U.S. dollar as the quote currency since these are the trickier ones:
1) The rate for the USD/CHF is currently quoted at 0.9191 / 0.9195.
Let’s say we are looking to sell the USD/CHF, this means we will be
working with the ‘bid’ price of 0.9191, or the rate at which the market
is prepared to buy from you.
2) You then sell 1 standard lot (100,000 units) at 0.9191
3) A couple of days later the price moves to 0.9091 / 0.9095 and you
decide to take your profit of 96 pips, but what dollar amount is that??
4) The new quote price for the USD/CHF is 0.9091 / 0.9095. Since you
are now closing the trade you are working with the ‘ask’ price since you
are going to buy the currency pair to offset the sell order you
previously initiated. So, since the ‘ask’ price is now 0.9095, this is
the price the market is willing to sell the currency pair to you, or the
price that you can buy it back at (since you initially sold it).
5) The difference between the price you sold at (0.9191) and the price you want to buy back at (0.9095) is 0.0096, or 96 pips.
6) Using the formula from above, we now have (.0001 / 0.9095) x 100,000 = $10.99 per pip x 96 pips = $1055.04
For currency pairs where the U.S. dollar is the quote currency,
calculating profit or loss is pretty simple really. You simply take the
number of pips you gained or lost and multiple that by the dollar per
pip you are trading, here’s an example:
Let’s say you trade the EURUSD and you buy it at 1.3200 but the price
moves down and hits your stop at 1.3100….you just lost 100 pips.
If you are trading 1 standard lot you would have lost $1,000 because 1
standard lot of pairs with the U.S. dollars as the quote currency = $10
per pip, and $10 per pip x 100 pips = $1,000
If you had traded 1 mini-lot you would have lost $100 since 1
mini-lot of USD quote pairs is equal to $1 per pip and $1 x 100 pips =
Always remember: when you enter or exit a trade you have to deal with
the spread of the bid/ask price. Thus, when you buy a currency you will
use the ask price and when you sell a currency you use the bid price.