Forex is commonly traded in specific amounts called lots, or basically the number of currency units you will buy or sell.

A “lot” is a unit measuring a transaction amount.

When you place orders on your trading platform, orders are placed in sizes quoted in lots.

It’s like an egg carton (or egg box in British English). When you buy eggs, you usually buy a carton (or box). One carton includes 12 eggs.

The standard size for a lot is 100,000 units of currency, and now, there are also mini, micro, and nano lot sizes that are 10,000, 1,000, and 100 units.

LOT NUMBER OF UNITS
Standard 100,000
Mini 10,000
Micro 1,000
Nano 100
الگو ی انبرک

Here is where we’re going to do a little math. Just a little bit.

You’ve probably heard of the terms “pips,” “points“, “pipettes,” and “lots” thrown around, and now we’re going to explain what they are and show you how their values are calculated.

Learn About Pips in Forex

Take your time with this information, as it is required knowledge for all forex traders.

 

Don’t even think about trading until you are comfortable with pip values and calculating profit and loss.

 

What the heck is a Pip?

The unit of measurement to express the change in value between two currencies is called a “pip.”

If EUR/USD moves from 1.1050 to 1.1051, that .0001 USD rise in value is ONE PIP.

A pip is usually the last decimal place of a price quote.

Most pairs go out to 4 decimal places, but there are some exceptions like Japanese yen pairs (they go out to two decimal places).

For example, for EUR/USD, it is 0.0001, and for USD/JPY, it is 0.01.

Pip

What is a Pipette?

There are forex brokers that quote currency pairs beyond the standard “4 and 2” decimal places to “5 and 3” decimal places.

They are quoting FRACTIONAL PIPS, also called “points” or “pipettes.”

If the concept of a “pip” isn’t already confusing enough for the new forex trader, let’s try to make you even more confused and point out that a “point” or “pipette” or “fractional pip” is equal to a “tenth of a pip“.

For instance, if GBP/USD moves from 1.30542 to 1.30543, that .00001 USD move higher is ONE PIPETTE.

Pipette

Here’s how fractional pips look like on a trading platform:

Fractional Pip

On trading platforms, the digit representing a tenth of a pip usually appears to the right of the two larger digits.

Here’s a pip “map” to help you to learn how to read pipspip cheat sheet

How to Calculate the Value of a Pip

As each currency has its own relative value, it’s necessary to calculate the value of a pip for that particular currency pair.

In the following example, we will use a quote with 4 decimal places.

For the purpose of better explaining the calculations, exchange rates will be expressed as a ratio (i.e., EUR/USD at 1.2500 will be written as “1 EUR / 1.2500 USD”)

Example #1: USD/CAD = 1.0200

To be read as 1 USD to 1.0200 CAD (or 1 USD/1.0200 CAD)

(The value change in counter currency) times the exchange rate ratio = pip value (in terms of the base currency)

[.0001 CAD] x [1 USD/1.0200 CAD]

Or simply as:

[(.0001 CAD) / (1.0200 CAD)] x 1 USD = 0.00009804 USD per unit traded

 

Using this example, if we traded 10,000 units of USD/CAD, then a one pip change to the exchange rate would be approximately a 0.98 USD change in the position value (10,000 units x 0.00009804 USD/unit).

 

We say “approximately” because as the exchange rate changes, so does the value of each pip move.

Example #2: GBP/JPY = 123.00

Here’s another example using a currency pair with the Japanese Yen as the counter currency.

Notice that this currency pair only goes to two decimal places to measure a 1 pip change in value (most of the other currencies have four decimal places). In this case, a one pip move would be .01 JPY.

(The value change in counter currency) times the exchange rate ratio = pip value (in terms of the base currency)

[.01 JPY] x [1 GBP/123.00 JPY]

Or simply as:

[(.01 JPY) / (123.00 JPY)] x 1 GBP = 0.0000813 GBP

So, when trading 10,000 units of GBP/JPY, each pip change in value is worth approximately 0.813 GBP.

How to Find the Pip Value in Your Trading Account’s Currency

The final question to ask when figuring out the pip value of your position is, “What is the pip value in terms of my trading account’s currency?”

After all, it is a global market and not everyone has their account denominated in the same currency.

 

This means that the pip value will have to be translated to whatever currency our account may be traded in.

This calculation is probably the easiest of all; simply multiply/divide the “found pip value” by the exchange rate of your account currency and the currency in question.

If the “found pip value” currency is the same currency as the base currency in the exchange rate quote:

Using the GBP/JPY example above, let’s convert the found pip value of .813 GBP to the pip value in USD by using GBP/USD at 1.5590 as our exchange rate ratio.

If the currency you are converting to is the counter currency of the exchange rate, all you have to do is divide the “found pip value” by the corresponding exchange rate ratio:

.813 GBP per pip / (1 GBP/1.5590 USD)

Or

[(.813 GBP) / (1 GBP)] x (1.5590 USD) = 1.2674 USD per pip move

So, for every .01 pip move in GBP/JPY, the value of a 10,000 unit position changes by approximately 1.27 USD.

If the currency you are converting to is the base currency of the conversion exchange rate ratio, then multiply the “found pip value” by the conversion exchange rate ratio.

Using our USD/CAD example above, we want to find the pip value of .98 USD in New Zealand Dollars. We’ll use .7900 as our conversion exchange rate ratio:

0.98 USD per pip X (1 NZD/.7900 USD)

Or

[(0.98 USD) / (.7900 USD)] x (1 NZD) = 1.2405 NZD per pip move

For every .0001 pip move in USD/CAD from the example above, your 10,000 unit position changes in value by approximately 1.24 NZD.

Forex trading involves trying to predict which currency will rise or fall versus another currency.

How do you know when to buy or sell a currency pair?

In the following examples, we are going to use a little fundamental analysis to help us decide whether to buy or sell a specific currency pair.

The supply and demand for a currency changes due to various economic factors, which drives currency exchange rates up and down.

Each currency belongs to a country (or region). So forex fundamental analysis focuses on the overall state of the country’s economy,  such as productivity, employment, manufacturing, international trade, and interest ratezzzzzzzz.

Wake up!

If you always fell asleep during your economics class or just flat out skipped economics class, don’t worry!

We will cover fundamental analysis in a later lesson.

Learn to Trade Forex

But right now, try to pretend you know what’s going on…

EUR/USD

In this example, the euro is the base currency and thus the “basis” for the buy/sell.

 

If you believe that the U.S. economy will continue to weaken, which is bad for the U.S. dollar, you would execute a BUY EUR/USD order.

 

By doing so, you have bought euros in the expectation that it will rise versus the U.S. dollar.

If you believe that the U.S. economy is strong and the euro will weaken against the U.S. dollar, you would execute a SELL EUR/USD order.

By doing so, you have sold euros in the expectation that it will fall versus the US dollar.

USD/JPY

In this example, the U.S. dollar is the base currency and thus the “basis” for the buy/sell.

If you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order.

 

By doing so you have bought U.S dollars in the expectation that it will rise versus the Japanese yen.

 

If you believe that Japanese investors are pulling money out of U.S. financial markets and converting all their U.S. dollars back to yen, and this will hurt the U.S. dollar, you would execute a SELL USD/JPY order.

By doing so you have sold U.S dollars in the expectation that it will depreciate against the Japanese yen.

GBP/USD

In this example, the pound is the base currency and thus the “basis” for the buy/sell.

 

If you think the British economy will continue to do better than the U.S. in terms of economic growth, you would execute a BUY GBP/USD order.

 

By doing so you have bought pounds in the expectation that it will rise versus the U.S. dollar.

If you believe the British economy is slowing while the American economy remains strong like Chuck Norris, you would execute a SELL GBP/USD order.

By doing so you have sold pounds in the expectation that it will depreciate against the U.S. dollar.

How to trade forex with USD/CHF

In this example, the U.S. dollar is the base currency and thus the “basis” for the buy/sell.

If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order.

By doing so you have bought U.S. dollars in the expectation that it will appreciate versus the Swiss Franc.

If you believe that the U.S. housing market weakness will hurt future economic growth, which will weaken the dollar, you would execute a SELL USD/CHF order.

By doing so, you have sold U.S. dollars in the expectation that it will depreciate against the Swiss franc.

Trading in “Lots”

When you go to the grocery store and want to buy an egg, you can’t just buy a single egg, they come in dozens or “lots” of 12.

In forex, it would be just as foolish to buy or sell 1 euro, so they usually come in “lots” of 1,000 units of currency (micro lot), 10,000 units (mini lot), or 100,000 units (standard lot) depending on your broker and the type of account you have (more on “lots” later).

Margin Trading

“But I don’t have enough money to buy 10,000 euros! Can I still trade?”

You can! By using leverage.

When you trade with leverage, you wouldn’t need to pay the 10,000 euros upfront. Instead, you’d put down a small “deposit”, known as margin.

Leverage is the ratio of the transaction size (“position size”) to the actual cash (“trading capital”) used for margin.

For example, 50:1 leverage, also known as a 2% margin requirement, means $2,000 of margin is required to open a position size worth $100,000.

 

Margin trading lets you open large position sizes using only a fraction of the capital you’d normally need.

 

This is how you’re able to open $1,250 or $50,000 positions with as little as $25 or $1,000.

You can conduct relatively large transactions with a small amount of initial capital.

Let us explain.

We will be discussing margin in more detail later, but hopefully, you’re able to get the basic idea of how it works.

Listen carefully because this is very important!

  • You believe that signals in the market are indicating that the British pound will go up against the U.S. dollar.
  • You open one standard lot (100,000 units GBP/USD), buying with the British pound with a 2% margin requirement.
  • You wait for the exchange rate to climb.
  • When you buy one lot (100,000 units) of GBP/USD at a price of 1.50000, you are buying 100,000 pounds, which is worth $150,000 (100,000 units of GBP * 1.50000).
  • Since the margin requirement was 2%, then US$3,000 would be set aside in your account to open up the trade ($150,000 * 2%).
  • You now control 100,000 pounds with just $3,000. 
  • Your predictions come true and you decide to sell. You close the position at 1.50500. You earn about $500.
Your Actions GBP USD
You buy 100,000 pounds at the exchange rate of 1.5000 +100,000 -150,000
You take a power nap for 20 minutes and the GBP/USD exchange rate rises to 1.5050 and you sell. -100,000 +150,500
You have earned a profit of $500. 0 +500

When you decide to close a position, the deposit (“margin”) that you originally made is returned to you and a calculation of your profits or losses is done.

This profit or loss is then credited to your account.

Let’s review the GBP/USD trade example above.

  • GBP/USD went up by a mere half a pence! Not even one pence. It was half a pence!
  • But you made $500!
  • While taking a power nap!
  • How? Because you weren’t trading just £1.
  • If your position size was £1, yes, you would’ve made only half a pence.
  • But…your position size was £100,000 (or $150,000) when you opened the trade.
  • What’s neat is that you didn’t have to put up that entire amount.
  • All that was required to open the trade was $3,000 in the margin.
  • $500 profit from $3,000 in the capital is a 16.67% return!
  • In twenty minutes!
  • That’s the power of leveraged trading!
الگو ی انبرک

“Long” and “Short”

How Trading Forex Works
First, you should determine whether you want to buy or sell.

If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a higher price.

In trader talk, this is called “going long” or taking a “long position.” Just remember: long = buy.

If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a lower price.

This is called “going short” or taking a “short position”.

Just remember: short = sell.

How to make money trading forex by going long and short at the same time.

 

“I’m long AND short.”

Flat or Square

If you have no open position, then you are said to be “flat” or “square”.

Closing a position is also called “squaring up“.

Forex Square Trade

 

“I’m square.”

The Bid, Ask and Spread

All forex quotes are quoted with two prices: the bid and ask.

In general, the bid is lower than the ask price.

EUR/USD forex quote

What is “Bid”?

The bid is the price at which your broker is willing to buy the base currency in exchange for the quote currency.

This means the bid is the best available price at which you (the trader) can sell to the market.

If you want to sell something, the broker will buy it from you at the bid price.

What is “Ask”?

The ask is the price at which your broker will sell the base currency in exchange for the quote currency.

This means the ask price is the best available price at which you can buy from the market.

Another word for ask is the offer price.

If you want to buy something, the broker will sell (or offer) it to you at the ask price.

What is “Spread”?

The difference between the bid and the ask price is known as the SPREAD.

On the EUR/USD quote above, the bid price is 1.34568 and the ask price is 1.34588. Look at how this broker makes it so easy for you to trade away your money.

  • If you want to sell EUR, you click “Sell” and you will sell euros at 1.34568.
  • If you want to buy EUR, you click “Buy” and you will buy euros at 1.34588.

Here’s an illustration that puts together everything we’ve covered in this lesson:

Bid, Ask and Spread Example in Forex Trading

Now let’s take a look at some examples.