What are Pips and Lots?

In this article our forex course we have to do some basic math. You've probably heard the terms " pips " and " lots " if you've already read about the Forex market. Then we 'll show you they are and how they are calculated.

Take time to digest this information, since it is vital knowledge that every Forex investor must learn and manage . Do not even think to start doing Forex trading without being able to calculate the value of a pip and unable to calculate gains and losses.

Qué es un Pip?

A pip is the minimum possible change in the value of a currency pair . If for example the EUR / USD moves from 1.3150 to 1.3151, that is 1 PIP. A pip is the last decimal in the price. Through pips profits and losses are calculated.

As each currency has its own value, it is necessary to calculate the value of a pip for each currency in particular.

In pairs where the US dollar (USD) is the base currency, the calculation would be:

Imagine the USD / JPY to a value of 119.80 (see that for this pair only two decimals are used, while the vast majority use four decimal places).

En el caso de USD / JPY, 1 pip equivale a .01

That is to say,

USD/JPY:

119.80 
.01 divided by the price = pip value. 
01 / 119.80 = 0.0000834

It might seem a small number, but then we'll see how everything is relative to lot size.

USD/CHF:

1.5250 
0.0001 divided by the price = pip value. 
0.0001 / 1.5250 = 0.0000655

USD/CAD:

1.4890 
0.0001 divided by the price = pip value. 
.0001 / 1.4890 = 0.00006715

In the case when the dollar (USD) is the base currency, and we get the dollar value of a pip, it will require an extra step .

EUR/USD:

1.2200 
0.0001 divided by the price = pip value. 
Thus
.0001 / 1.2200 = EUR 0.00008196 
But we want to get the dollar value, so we make a calculation more than 
EUR x Quote 
and
0.00008196 x 1.2200 = 0.00009999

We round to be 0.0001.

GBP / USD:
1.7975 
.0001 divided by the share price = pip value. 
Thus
.0001 / 1.7975 = GBP 0.0000556 
But we want to get the dollar value, so we make a calculation over 
GBP x Quote. 
Thus.0000556 x 1.7975 = 0.0000998

We round 0.0001.

In the next section we find out how these numbers may seem insignificant can have a big impact by investing in Forex.

What is a lot?

Forex operating in batches . The standard size of a lot is $ 100,000. There are also mini-batches that are $ 10,000. And even micro-lots are $ 1,000. As you have learned, currencies are measured in pips, which are the minimum increase possible. To achieve some benefit out of these small increments, we need large amounts of operating a particular currency to achieve any significant gain or loss.

Let's assume that we will use a standard lot of $ 100,000. We will do some calculations to see how the value of a pip is affected.

USD / JPY a una tasa de 119.90
(.01 / 119.80) x $ 100,000 = $ 8:34 por pip

USD / CHF a una tasa de 1.4555
(.0001 / 1.4555) x $ 100,000 = $ 6.87 por pip

In the case when the dollar is first, the formula changes a little.

EUR / USD at a rate of 1.1930(0.0001 / 1.1930) = 100.000 EUR X EUR 8.38 x 1.1930 = $ 9.99734 and rounded to $ 10 per pip.

GBP / USD at a rate of 1.8040
(0.0001 / 1.8040) x 100,000 = 5.54 x GBP 1.8040 = 9.99416 and rounded to $ 10 per pip.

Depending on the online broker with whom we work, they may have some different characteristics when calculating the value of a pip on the lot size. But in any case, as market prices vary, so you can be changing the value of a pip according to the currency being used.

How do I calculate profits and losses?

Now that we know how to calculate the value of a pip, let's see how we would calculate our profit or loss.

Let's take an example where we buy US dollars (USD) and sell Swiss Francs (CHF).

Imagine that the quote is 1.4525 / 1.4530. As we are buying USD, the price of ask is used , which is 1.4530.

We buy 1 lot of $ 100,000 to 1.4530.

A few hours later, the price rose to 1.4550 and decided to close the operation.

The new rate is 1.4550 / 1.4555. As we are closing the transaction, and initially made a purchase to start the operation, we need to close the same with a sale , with the price of 1.4550.

The difference between 1.4530 and 1.4550 is 0.0020 or 20 pips.

Using our above formula, calculate a gain (0.0001 / 1.4550) x $ 100,000 = $ 6.87 x 20 pips pip = $ 137.40.

Remember that when a position opens, are subject to spread is the difference between the bid / ask and it is the commission that brokers receive for performing the operation. .

When purchased, the price ask will be used and sold when the price of the bid will be used.

What is Leverage or Leverage?

We've talked a bit about leverage in the previous article ( How Money Forex you win ?) But if you have not seen it yet, you're probably wondering how a small investor like you could handle such large sums of money. Think of your Forex broker as a bank lends you $ 100,000 to buy currencies but only asks for a deposit of $ 1000 as a guarantee of good faith or guarantee to perform the operation. It sounds too good to be true, but that's how leverage is used in Forex market or some other investment instruments.

The maximum level of leverage available to use depends on the broker with whom you work and be more of an investment instrument to another.

Generally online brokers that offer services to retail customers require very small initial minimum deposit to open a trading account. Once deposited the money, you can perform operations on Forex. The broker also tell you that you need to margin available in your account as collateral for operations

For example, imagine that your broker offers a leverage of 1: 100. For every $ 1000 you have available in your account, you can open operations 1 lot of $ 100,000. So if you have $ 5,000, you could get a handle a position of $ 500,000 (5 lots).

The margin for each lot (margin) may vary considerably from one broker to another. In the example above, the broker requires a margin of 1%. This means that for every $ 100,000 invested, the broker holds a $ 1000 deposit as collateral.

What is a margin call or margin-call?

Addition of margin required to open a position there is also a maintenance margin so that your position is still open. In the case where the money from your trading account falls below the required margin requirements, the broker will close some of the positions you have open to reposition your balance and account within the required margin. This is a measure to prevent you have a negative balance and incur a debt. These measures to avoid negative balances are automatically executed according to the evolution of your positions, even in a highly volatile and fast as the Forex market environment.

Example # 1
Suppose you open an account with $ 2000 and buy a lot of EUR / USD with a margin requirement of $ 1000. The usable margin is the money available to open new positions or operating losses. As started with $ 2000 usable margin is $ 2000. But when a lot, which requires a margin of $ 1000, the available margin is now $ 1000 it opens.

If your position goes into losses and those remaining $ 1000 free in your own trading account do not cover maintenance margin requirements will occur the margin call or margin call.

Example # 2
Suppose open an account Forex $ 10,000. 1 lot of EUR negotiate / USD with a margin requirement of $ 1000. Remember that the margin available you can use to open new positions or sustain any losses from current open positions. Before opening the position, you would have $ 10,000 of margin available. After opening the position, you have $ 9000 of usable margin.

Make sure you understand the difference between usable margin and used margin.

If your account balance falls below the usable margin due to losses, you have to deposit more money or the broker will close the position to limit risk both for you and for them. As a result of this you can never lose more than the amount you have deposited.

It is vital to know the margin requirements regarding the online broker you will use and feel comfortable with the risk you are taking in each operation.