Introduction to Currency Trading Part II

 


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What is Pip?

Pip stands for percentage in point. It is the smallest price unit of a currency.

In Forex (foreign exchange), each currency has different value of 1 pip. 1 pip is equal to 1 point at the last number on each currency pair. For example, if you see Eur/Usd are traded at 1.2945 then price moves to 1.2946. We could say that price is moving upward for 1 pip. And if price moves to 1.2950 then we could say that price is moving upward for 5 pips.

Other example, Usd/Jpy are traded at 117.10. If price moves to 117.11 then we could say that price is moving upward for 1 pip. And if it moves to 117.15 then we could say that price is moving upward for 5 pips.

What is Lot?

Lot describes the standard unit size of a transaction. There are some unit sizes that used in forex. Those are:

  1. Standard Lot. In standard lot, 1 lot is equal to 100,000 unitsMini Lot
  2. Mini Lot. In mini lot, 1 lot is equal to 10,000 units.
  3. Micro Lot. In Micro lot, 1 lot is equal to 1,000 units.
But some brokers may offer no fixed size of lot that allow their clients to trade in units.

What is Spread?

Spread is the difference between the sell quote (bid) and the buy quote (ask). If Eur/Usd quotes read 1.2910/1.2912 then the spread is 2 pips.

How to calculate profit?

Let’s us assume that we are using Standard lot. It means that 1 lot is equal to 100,000 units. Let’s see how to calculate your profit in each currency pair.

  • Eur/Usd Let’s say we buy Eur/Usd when the rate is 1.2908/1.2910 (bid or sell quote=1.2908 and ask or buy quote=1.2910). It means that we buy euro and sell dollar exactly at the same time at 1.2910. Why it has to be 1.2910? Because that’s the value of buy quote.

    Now Eur/Usd is moving to 1.2920/1.2922. And we decide close the order. It means that we sell in order to exit the trade at 1.2920. Why it has to be 1.2920? Because that’s the value of the sell quote.

    Our trade is ended with profit of +10 pips (1.2920 – 1.2910).

    How many is +10 pips in dollar? Let’s calculate it.

    In cases where the dollar is not quoted first (such as: Eur/Usd, Gbp/Usd, Nzd/Usd, etc), then we are using this is the formula:

    (1 pip value/exit value) x (lot size) x (exit value) = profit or loss in dollar.

    So, our profit would be: (0.0001/1.2920) x (100,000) x (1.2920) = $10

    Note:

    The number of 0.0001 is came from 1 pip is equal to 0.0001 in Eur/Usd pair.

  • Usd/Jpy Let’s say we buy Usd/Jpy when the rate is 117.07/117.10 (bid or sell quote=117.07 and ask or buy quote=117.10). It means that we buy dollar and sell yen exactly at the same time at 117.10. Why it has to be 117.10? Because that’s the value of buy quote.

    Now Usd/Jpy is moving to 117.20/117.23. And we decide close the order. It means that we sell in order to exit the trade at 117.20. Why it has to be 117.20? Because that’s the value of the sell quote.

    Our trade is ended with profit of +10 pips (117.20 – 117.10).

    How many is +10 pips in dollar? Let’s calculate it.

    In cases where the dollar is quoted first (such as: Usd/Jpy, Usd/Chf, etc), then we are using this is the formula:

    (1 pip value/exit value) x (lot size) = profit or loss in dollar.

    So, our profit would be: (0.01/117.20) x (100,000) = $8.53

    Note:

    The number of 0.01 is came from 1 pip is equal to 0.01 in Usd/Jpy pair.

    Click here to read more about the article.

    Richie is a forex trader and forex technical analyst.

    You may read my articles at Forex Library and my daily technical analysis at my brother's blog: Brian Signal

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