Currencies are traded in pairs

When a currency is bought, another currency must be sold in exchange, and, conversely, when a currency is sold, another currency must be bought in exchange. This act of simultaneous buying and selling is the most important aspect of forex: a currency is always traded against another currency. Thus currencies are always traded in pairs – for example, the US dollar and the Japanese Yen (USD/JPY) or the Euro and the US dollar (EUR/USD). The first currency in the pair is known as the

base currency, and the second currency is the counter or terms currency.

Trade size

In some forex trading platforms, trades are executed in standard sizes of 10,000 base currency per one lot, but in other platforms, trades are executed in standard sizes of 100,000 base currency per one lot. Therefore, there is no universal definition of what a “standard-sized” lot is, even though a “standard lot” typically refers to a trade size of 100,000 base currency units in the realm of retail currency trading. There is usually no maximum trading size, but some brokers require that you request for a quote over the telephone for trading sizes bigger than 10,000,000 base currency units.

Pips

What are pips?

“Pips” will be one of the most common words that you will use when you trade forex. The term pip stands for percentage in point. It represents the smallest incremental move an exchange rate can make. For example, 1 pip is 0.0001 for USD/CHF, or 0.01 for USD/JPY.

How to calculate pip values

In currency pairs where the counter currency (the second symbol in a pair) is the US dollar, for example, EUR/USD, GBP/USD or AUD/USD, one pip always equals US$10, for every 100,000 currency units. For other currency pairs, where the USD is the base currency (the first symbol in a pair), one pip will usually be worth less than US$10 for every 100,000 currency units, and it varies slightly due to fluctuating exchange rates.

Here is the formula that is used to calculate pip value:

Value of a pip = (one pip, with the appropriate decimal placement/currency exchange rate) x (trade amount)

Note that the two variables are the exchange rate and the trade amount.

Variable Pip Value

Let’s say you want to calculate how much one pip is worth for US$100,000 of USD/CHF at the time when the USD/CHF exchange rate is around 1.2200.

Pip value = (0.0001/1.2200) x US$100,000

= US$8.19

Therefore, if you have made 30 pips on US$100,000 worth of USD/CHF trade, your profit would be 30 x US$8.19 = US$245.70.

Here is another example.

Let’s say you want to calculate how much one pip is worth for US$100,000 of USD/JPY at the time when the USD/JPY exchange rate is around 119.20.

Pip value = (0.01/119.20) x US$100,000

= US$8.38

Notice that:

one pip in USD/JPY is expressed as 0.01 because the exchange rate of USD/JPY has two decimal places, but
one pip in USD/CHF is expressed as 0.0001 because the exchange rate of USD/CHF has four decimal places.

Fixed Pip Value

Now, let us calculate how much one pip is worth for 100,000 Euros of EUR/USD at the time when the EUR/USD exchange rate is around 1.3000.

Pip value = (0.0001/1.3000) x EUR100,000

= EUR7.69

As you have noticed, the value is in Euros. So to convert the pip value from Euros to US dollars, you multiply EUR7.69 by the current EUR/USD exchange rate, which is 1.3000 in this example.

Pip value = EUR7.69 x 1.3000

= US$10.00

This two-step calculation explains why the pip value is always US$10 per 100,000 currency units for currency pairs that quote the USD as the counter currency.

So if you have traded £100,000 worth of GBP/USD, and you have a 20 pip profit, you would get 20 x US$10, which is US$200 profit.