The next forex lingo to be learned is the word “lots.” This is again another vital term since this is how forex is traded, in lots. So what is a lot in foreign exchange trading? There are two lot sizes in forex, the standard lot size of $100,000 and the mini lot size of $10,000. Since currencies are measured through their smallest increment called pips, profit or loss can only become significant if the currencies are traded in huge amounts. Therefore, to take advantage of the very small increments (that reach a lot of decimal places when computed), it is important to trade in lots.
To illustrate how the pip value is affected by the lot size, below are some examples. I will be using the standard lot size of $100,000 to compute the following forex quotes, which we also used as examples with the computation of the value of pip above.
USD/JPY with 119.90 as the exchange rate (pip/exchange rate) x lot = value per pip
(0.01/119.90) x $100,000 = $8.34/pip
USD/CAD 1.4910 (pip/exchange rate) x lot = value per pip
(0.0001/1.4910) x $100,000 = $6.70/pip
EUR/USD 1.2400 (pip/exchange rate) x lot = value per pip
(0.0001/1.2400) x $100,000 = $8.06
Just as with the computation of the value of the pip wherein a step is added in cases where the first currency quoted is not the U.S. dollar, the same thing applies with lots. The same formula will be applied but this time, the exchange rate will be multiplied by the value per pip. Below are more examples.
EUR/USD 1.2400 (pip/exchange rate) x lot = value per pip x exchange rate = value per pip in US dollars
(0.0001/1.2400) x $100,000 = $8.06 x 1.2400 = $9.9944 or $10 when rounded off
CHF/USD 1.4530 (pip/exchange rate) x lot = value per pip x exchange rate = value per pip in US dollars
(0.0001/1.4530) x $100,000 = 6.88 x 1.4530 = $9.9966 or $10 when rounded off
Pip values move as the market moves depending on the currency being traded. Brokers may have different styles of computing pip values in connection with the lot size. However they do it, they would still provide you with these details.
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