Surely you had ever heard of pips and lots, but you know everything about these terms? How are they calculated? If this is not the case then this section is for you.
To deal with Forex, it is essential to master these concepts. They will help you calculate your profits and losses and so set your stops correctly.
What is a pip?
A pip is the smallest unit of change in exchange rates (see listings). As you can see, the currency pairs are quoted in 4 digits for most. A pip is the last decimal. If the EUR / USD rose from 1.4018 to 1.4019, this means that the euro has appreciated by one pip against the dollar. A pip is equal to 0.0001. In contrast to the USD / JPY, the pip has not the same since the quotation is not only two decimals. A pip is equal to 0.01. You will understand the value of a pip depends on the currency pair for each currency has its own value. It allows each transaction, depending on the currency pair on which you process, calculate your gain or loss.
Now that you know what a pip, you can proceed to its calculation. The value of a pip is equal to the smallest unit of a pair of currencies / exchange rates
Let our previous examples:
For the USD / JPY, the smallest unit of measurement is 0.01 since the listing is done in 2 decimals. Suppose the USD / JPY 90.68 rating, and one deals with a batch of 100 000 Dollars Value of a pip (JPY) = 100 000 * 0.01 = 1,000 JPY
The value of a pip is always calculated in the currency listed (here is the JPY)
To know the dollar amount it can then do the following operation:
Value of a pip (USD) = 1000/90.68 = 11.03 USD
For the EUR / USD, the smallest unit of measure is 0.0001 since trading occurs in 4 decimal places.
Suppose the EUR / USD 1.4018 and ratings that are dealing with a consignment of 100 000 Euros
Value of a pip (USD) = 100 000 * 0.0001 = USD 10
The value of a pip is always calculated in the currency listed (here the U.S.)
To know the euro amount, then just doing the following:
Value of a pip (EUR) = 10/1.4018 = 7.13 EUR
The value of a pip depends also on the price quotation currency.
What is Lot Size ?
Forex, it is possible to batch. It is the investment unit on the market. The standard size of a batch of 100 000E. But according to the type of account you open your broker, the lots are smaller. There are lots of 10 000E and 000E of 1. The latter is often the minimum size to deal Forex with many brokers. Does this sound great but do not panic. Indeed, the consignments are linked with the pips which as you know now are a unit measuring very small. It is therefore necessary to address significant quantities to make significant gains and losses. The lots will actually serve to increase the value of a pip.
Consider an example. You decide to treat using a set of 10 000E. The EUR / USD 1.4018 rating.
Value of a pip = (0.0001/1.4018) * 10 = 0.7133 EUR 000EUR
This means that if the EUR / USD is one pip or loses, you win or lose depending on your position 0.7133 EUR. The value of a pip is constantly evolving as it depends on the price side. However, once your stance on the market, the amount of your winnings or losses will depend on the value of a pip at the time of your entry. Thus, you can calculate your gains or losses.
The simplest remaining still set its gain or loss in money won or lost. The example for the EUR / USD would: gain or loss from $ 40 to a position of 10,000 is made on an upward (downward in the direction of trade) of 40 pips. (40USD / 10,000 = 0.0040 = 40 pips).
Practical Implementation
The EUR / USD rating 1.4018 / 1.4020. You expect a falling dollar. You then buy the euro.
1. Your entry price is 1.4020 (purchase price. 1.4018 is the selling price) since it is the price at which traders are willing to sell you the EUR.
2. You use a lot of 10 000E
The value of a pip is equal to 1 USD or (0.0001/1.4020) * 10000 = 0.7132E during 1.4018 / 20. A week later, you unbuckle your position. The EUR / USD 1.4050/1.4052 then rated Your exit price is to 1.4050, since this is the price at which traders are ready to buy the EUR.
Your gain is 30 pips, making a total of $ 30 or 21.35 euros ($ 30 during resale earned USD (1.4050 at the time of resale of the EUR / USD)
0 comments:
Post a Comment