Newcomers to Forex often cannot easily understand trading volumes in lots, pips and how to calculate them. First we really need to understand that Forex trades are done in ‘lots’, which is a volume of a particular currency pair. By standard definition 1 lot is 100,000 currency units and the units are always calculated on the base currency being traded (which is the first currency in the pair). So 1 lot of EUR/USD is a trade of €100,000 and 1 lot of USD/CHF is $100,000. In cases where smaller amounts are to be traded then trading is done via what is often referred to as Mini Lots and Micro Lots. A mini Lot is 0.1 of a standard lot or 10,000 currency units and a micro Lot is 0.01 of a standard lot or 1,000 currency units. In many cases brokers or platforms will not use mini or micro lots and traders will be ordering 0.1 or 0.01 of a standard lot. It is important to note that all popular trading platforms use lots to place orders and there is often no mention of currency value until your order is placed. Therefore it is very important to understand lot calculations.
Now that we understand what lots are, we need to understand pip values in order to understand profit/losses from trading (which are often referred to in pips).
The first thing to know is that the pip is usually the 4th decimal price difference, which is often used to define a market movement, a profit/loss in a trade or to define a spread. Note that with some currency pairs that offer the Japanese Yen the pip value is the 2nd decimal.
With EUR/USD and most currency pairs 1 pip = 0.00010 (note. the pip value is the 4th decimal)
With USD/JPY and similar currency pairs 1 pip = 000.010 (note. The pip value is the 2nd decimal)
To help understand this better we will take a look at these 3 scenarios where a pip value is used.
To define a spread:
If the EUR/USD has a Bid price of 1.36108 and an Ask price of 1.36120 then the difference is 0.00012 or 1.2 pips
To define market movement:
If the USD/CAD has a market price of 1.08235 and it moves to 1.08363 then the difference of 0.00128 is more commonly referred to as a market movement of 12.8 pips
To define profit/loss in a trade:
If a USD/JPY position is opened at 105.061 and it is closed at 104.999 then the difference of 0.562 is otherwise referred to 56.2 pips.