The Pip and The Lot

As we already said, you had often listen to in the news "Stock-market X has raised so many points...". Then the form to measure the currencies is by means of points also that are called Pip (Percentage in points).

The Pip will be the minimum unit of movement of a currency, is to say a pip in the quotation of a determined currency. Let us suppose that GBP/USD is in 1.9671 and raises to 1,9693, it will have raised 22 pips. Each pip is equivalent to a point of gain or loss.

However, like you will be able to see in the platform that you use, the pairs are represented by 5 numbers. But some pairs are represented with 4 numbers decimal and other pairs with 2 numbers decimal. So that you will be able to see pairs with following formats 1,2345 or 123.45.

In the pairs with four numbers decimal pip was expressed of following form 0,0001 and in those of two numbers decimal is 0.01.

The Value of the Pip

Each pair has a different value of pip, but the platform will automatically make the calculations this that we are going to explain you , you can not see it. But we consider necessary explain you this.

The value of pip will not be calculated in the same way in those pairs on which the base currency is the dollar, that in those where the quote currency is the dollar the procedure will be different having to add a step.

Calculations with base currency USD

Let us suppose the USD/JPY a pip would be equivalent to 0.01.

USD/JPY

Currency value= 121.01
Pip value = 0.01/121.01= 0.0000826

USD/CAD

Currency value= 1.1852
Pip value=0.0001/1.1872= 0.0008423

USD/CHF

Currency value=1.2473
Pip value= 0.0001/1.2473= 0.0000801

Calculations with quote currency USD

Now we are going to make the calculations in those currencies in which the Dollar is not the base currency but it is quote currency. Therefore we will have to modify the form to calculate pip.

GBP/USD

Currency value=1.9671
Previous Pip value= 0.0001/1.9671= 0.0000508

Now we will have to calculate the value of pip with respect to the Dollar. We will add the following operation to obtain the result.

Pip value = Previous Pip value x Currency value.

Pip value = 0.0000508x1.9671= 0.00000999 (we round it to 0.0001)

EUR/USD

Currency value=1.2965
Previous Pip value= 0.0001/1.2965= 0.0000771
Pip value = 0.0000771x1.2965= 0.0000999 (We round it to 0.0001)

The Lot

At the time of buying or selling a certain pair we must pay spread. In order to buy a certain currency, we will buy at the cost of buy/ask. In case that we want to sell a certain currency, we will sell this currency at the cost of sell/bid.

As we already saw in Forex currencies are moderate by pips, but these currencies are bought by Lots. A standard lot will be 100,000 dollars, but also lots of 10,000 dollars exist. The Lot also is known like Contract.

These values can vary depending on the Broker that is used, but in its majority they are the following ones:

When we made the calculation of the value of pip we have seen that they left very small numbers to us. In order to obtain a benefit that we consider good we will have therefore to operate with great numbers. That way we will obtain great benefits or also great losses starting off of those small values of pip.

Next we are going to see which will be the benefits that we would obtain by pip which we obtained. But you will have to consider that also can be lost. However, these calculations that we are going to see, you will not have to do your since broker made it automatically.

Like in pips, we will see that it is not the same to calculate the gain by pip for those pairs with the base currency is USD that those pairs with quote currency is USD.

We are going to suppose that we will buy lots of 100,000 dollars and of that way to see whatever we will gain by pip buying this amount.

USD/JPY

Currency Value= 121.01
Gain by pip= (0.01/121.01) x $100.000= $8.26 by each pip

USD/CAD

Currency Value= 1.1852
Gain by pip= (0.0001/1.1852) x $100.000= $8.43 by each pip.

Now we see in those pairs in which the dollar is not the base currency, but it is the quote currency.

GBP/USD

Valor de la divisa = 1.9671
Ganancia por pip = (0.0001/1.9671) x $100.000= $5.08 x 1.9671 = 9.9929 por cada pip que redondearíamos a 10 dólares por pip.

EUR/USD

Currency Value= 1.2965
Gain by pip= (0.0001/1.2965) x $100.000= $7.71 by each pip

A thing you will have to consider each broker has its form to calculate the gain by pip for the lot that you buy, but you will be able to ask to him which it is the gain by pip by bought lot. And you need to consider that each pair will have its corresponding value.

The Profit or the Loss

The Profit or the Lost will be calculated with base to pips and amount of lots that we have bought.

In the following example we will buy 1 lot (100,000 dollars standar lot) of USD/CAD, the prices of Bid/Ask and Sell/Buy are the next:1.1869/1.1873.

Therefore we will buy at the cost of 1,1873, but by some macroeconomic data, that pair has raised, being the new prices of Bid/Ask the next: 1,1901/1.1905.

In the case that, you decided to close then, that is to say, you are going to sell it. The price to which you will close it will be 1,1901, that will be the price that broker applied to close the position.

The difference between the price to which we have bought that it is of 1,1873 and to that we have sold 1,1901 will give 0,0028, that is to say, that we will have gained 28 pips.

Evidently the Broker is going automatically to give us the benefit, with no need that we calculate this benefit. But we considered that you must know as this benefit calculates.

So we will return to formula applied to calculate the Lots, due that this are a pair that it has to the USD as base currency, the formula used will be the following one:

Profit / Loss = (0,0001/ Price of the Bid) 100,000 xs = gain by pip x pips obtained = Total Profit/Loss.

Therefore:

Profit / Loss = (0.0001/1.1901) 100,000 xs = $8,4 by pip 28 x pips = $235.2

So that if we have gained 28 pips that will be our benefit, but in case that there were lost 28 pips, that will be our lost.