How to measure the Price and Investment?

Once we have seen how the Forex market works, we are going to delve into the amount of our investment. In this topic we are going to explain what pips are and what lots are. First of all it is a quite dense and complicated information that is difficult to assimilate, for this reason in more advanced courses of Traders Business School this syllabus will be explained in more depth and where we will use indicators to perform the calculations automatically.

What is a pip?

Let’s start by knowing what a Pip is. The minimum variation in currencies is a PIPS, let’s see it with an example, if the EUR/USD moves from 1.2250 to 1.2251, that is a PIPS. A pip is the last decimal of a quote, it is how you measure profit or loss. As each currency has its own value, it is necessary to calculate the value of a pip for each currency.

Calculation of the value of a pip

Let’s perform the calculation of each pip in currencies where the US dollar is quoted first:
Let’s take the USD/JPY exchange rate of 119.80 (note that this currency pair only goes to two decimal places, most other currencies go to four decimal places) In the case of USD/JPY, 1 pip would be 0.01.

Thus, we will have to:

USD/JPY with an exchange rate of 119.80:

0.01 Divided by the exchange rate = PIPS value
0.01 / 119.80 = 0.0000834

USD/CHF with an exchange rate of 1.5250

0.0001 divided by the exchange rate = PIPS value
0.0001 / 1.5250 = 0.0000655

USD/CAD with an exchange rate of 1.4890:

0.0001 divided by the exchange rate = PIP value
0.0001 / 1.4890 = 0.00006715

Until now we have used the dollar as the base currency, but when the dollar is not the base currency we will have to make one more change in the event that our account is in dollars:

EUR/USD with an exchange rate of 1.2200:

0.0001 Divided by the exchange rate = pip value therefore
0.0001 / 1.2200 = EUR0.00008196

In this case we have to return to US dollars so we will perform another calculation which is:

EUR x Exchange rate therefore

0.00008196 x 1.2200 = 0.00009999 = rounded = 0.00001

GBP/USD with an exchange rate of 1.7975:

0.0001 Divided by the exchange rate = pip value therefore
0.0001 / 1.7975 GBP = 0.0000556

In this case we have to return to US dollars so we will perform another calculation which is:

GBP x Exchange rate

0.0000556 x 1.7975 = 0.0000998 = rounded = 0.00001

Surely you think if you have to do this calculation for each value… No, the broker will do it for you automatically.

What is a batch?

Once we know what a pip is, we will see what a lot is and how we will calculate it. The standard lot size is €100,000, the mini lot size is €10,000 and €1,000 for a micro lot.

As we have seen before, currencies are measured in pips, which is the smallest increment of the currency. To take advantage of these small increments, you need to trade large amounts of a currency in order to see any profit or loss.

Let’s see it all with a example of a standard lot $100,000:

USD/JPY with an exchange rate of 119.80:

(0.01 / 119.80) x $100,000 = $8.34 per pip

USD/CHF with an exchange rate of 1.4555:

(0.01 / 1.4555) x $100,000 = $6.87 per pip

In cases where the US dollar is not quoted in the first place, the formula is a bit different:

EUR/USD with exchange rate of 1.1930:

(0.0001 / 1.1930) x EUR €100,000 = EUR 8.38 x 1.1930 = $9.99734 rounded to $10 per pip.

GBP/USD with an exchange rate of 1.8040:

(0.0001 / 1.8040) x GBP 100,000 = 5.54 x 1.8040 = $9.99416 rounded to $10 per pip.

All these calculations vary for each moment in which we find ourselves, since the market is always in movement. In Traders Business School courses we use both Excel templates to calculate them manually and indicators that perform all these calculations automatically.

Leverage and margin call

Once we have seen what a pip is and how much each one is worth, we are going to see what Leverage is and what Margin Call is.

Let’s think that our broker acts as a “Bank” that lends us $100,000 to buy and sell currencies and the only thing that asks us is that we keep $1000 as a good faith deposit, which will keep us but never retain it.

This is the way the Leverage works in Forex. The amount of leverage you use will depend on your broker and your trading experience. In the Basic Trading course we will see the different brokers that exist and the conditions that we must meet in order to enjoy better conditions.

The broker will require a minimum of the funds in our account, this is the account margin or initial margin. Once we deposit our money, we can operate directly. The broker will also specify how much you need per position (lot) traded.

As usual, with an example it is better understood, for every $1,000 we have, we will be able to trade 1 lot of $100,000. Similarly, if we have $5,000, they will allow us to trade up to $500,000 in Forex. The minimum margin for each of the lots varies from broker to broker, due to the conditions that we have with each one of them, From DTP we have agreements with several brokers to achieve the optimum quality in trading. The broker requires us a margin of 1% percent, this basically is that for every $100,000 of operation, the broker wants $1,000 that we have at least $1,000 in our account.

But What would happen if the money in our account falls below the required margin (usable margin)? Well, our broker will close some or all open positions until the account in question is settled. This prevents our account from falling into a negative balance, even in very volatile situations or rapid market movements. This is the margin call.

Some brokers describe their own leverage in terms of leverage ratio and others in terms of percentage margin. The simple relationship between the two terms is as follows:

Leverage = 100 / Margin Percentage
Percent Margin = 100 / Leverage

Leverage is displayed as a ratio, for example 1:100 or 1:200. At DTP we can get better returns for leverage, for those brokers that need more margin.

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