Importance of Determining Pip Value And Lot Sizes in Forex Trading
When trading in Forex, determining the pip value and selecting the right lot size is critical. Even a seemingly small error in choosing the lot size could make a significant difference in the trading results. While traders mostly focus on entry signals, money and risk management are what leads to success. However, beginners often lack sufficient experience to realize this, emphasizing the importance of learning to calculate pip values correctly and select appropriate lot sizes. To help with this process, one can use pip calculator found online to quickly determine the correct value without making mistakes or wasting time.
The pip value is calculated based on the trading volume and the current exchange rate. Suppose, for example, the trader decides to trade the EURUSD pair. When trading one lot, the trader is essentially trading 100,000 units of the base currency or €100,000 in this case. If the trader goes long, they would be buying €100,000 by selling the equivalent USD at the ASK price, which if assumed to be 1.1200, would require $112,000.
To determine the pip value, one has to multiply this amount by one pip and divide the total by the current exchange rate. In the case of the EURUSD symbol, the fourth decimal place represents one pip or 0.0001. So, for the €100,000 traded, the pip value would be derived as:
(0.0001 x €100,000) / 1.1200 = €8.93 or $10 per pip
For a traded value of €10,000 or €1,000, the pip values would be €0.89 or $1.00 per pip, and €0.09 or $0.10 per pip, respectively. As such, it’s essential to know that one standard lot equals 100,000 units of the base currency with a value of $10 per pip. Similarly, one mini-lot consists of 10,000 units and has a pip value of $1, while one micro-lot contains 1,000 units and has a pip value of $0.10. The consecutive lot sizes are one-tenth of the previous lot size.
When trading, the trader can select one standard lot (1.00), one mini-lot (0.10), or one micro-lot (0.01) to trade on the platform. Additionally, it’s possible to trade in combinations of these lot sizes. For instance, trading at a volume of 1.53 would translate to €153,000 in trade size with a pip value of $15.30.
The MT4 platform trade panel displayed below shows a trade size of 3 micro-lots or €3,000 selected for trading. Therefore, understanding pip value and lot sizes is crucial in Forex trading, especially for beginners.
How to Calculate Pip Value and Manage Risk in Forex Trading
Calculating the pip value when trading is critical as it helps one in determining the potential profits or losses per pip movement. In this case, determining the pip value is simple as the forex lot size for this trade is known to be €0.27 or $0.30. Using the value of a pip for one micro-lot of $0.10, a trade size of 3 micro lots would have a pip value of $0.30 per pip. Therefore, executing a €3,000 deal would mean exposing oneself to potential losses amounting to €0.27 or $0.30 per pip.
However, when trading currency pairs involving the Japanese yen, one has to use 0.01 instead of 0.0001 in the pip calculation as the pip value is in the second decimal place.
To manage risk effectively, one has to determine how much they are willing to risk per trade, taking into account the risk tolerance, trading performance, and comfort levels. A prudent Forex lot size should neither be too small nor too large and should be a small percentage of your balance. The balance between the lot size and the stop loss should be reasonable to avoid losing most of the balance.
Additionally, traders can make use of pip value and Forex lot size calculators, which are readily available online, to save time and prevent errors. The cTrader platform, for instance, has a built-in pip value calculator that gives a pop-up window displaying the pip value when hovering over the lot size field. This platform also tells the equivalent amount in terms of the account’s base currency.
A Guide on How to Calculate Profit from Pips in Forex Trading
Calculating profit from pips involves multiplying the number of pips captured by the pip value. For example, if the pip value is $10, and the trader captures 50 pips, then the profit is $500. The same formula is applicable when projecting potential pip value based on profit targets.
However, when calculating profit or loss, it’s essential to consider the account’s base currency. If the accounts base currency is denominated in a currency other than the US Dollar, such as the Swiss Franc (CHF), the pip value in USD would be converted based on the current USDCHF exchange rate. Similarly, if the base currency is in another currency, like the Australian Dollar (AUD), the pip value would be converted based on the current USDAUD exchange rate.
By default, the profit and loss are calculated in real-time and in terms of the account’s base currency. For AUDUSD exchange rate inversion to USDAUD, one can easily divide one by the AUDUSD exchange rate.
A Guide on How to Calculate Profit from Pips in Forex Trading
Calculating profit from pips involves multiplying the number of pips captured by the pip value. For example, if the pip value is $10, and the trader captures 50 pips, then the profit is $500. The same formula is applicable when projecting potential pip value based on profit targets.
However, when calculating profit or loss, it’s essential to consider the account’s base currency. If the accounts base currency is denominated in a currency other than the US Dollar, such as the Swiss Franc (CHF), the pip value in USD would be converted based on the current USDCHF exchange rate. Similarly, if the base currency is in another currency, like the Australian Dollar (AUD), the pip value would be converted based on the current USDAUD exchange rate.
By default, the profit and loss are calculated in real-time and in terms of the account’s base currency. For AUDUSD exchange rate inversion to USDAUD, one can easily divide one by the AUDUSD exchange rate.
In conclusion, calculating profit from pips is a simple and essential process in Forex trading. Understanding pip value and considering the account’s base currency is critical in trading profitability.
