In this part we have to do some basic math well. You've probably heard the terms "pips" and "lots" if it has done readings regarding Forex. In this section we'll show you who they are and how they are calculated.
Take time to digest this information, as it is vital knowledge every Forex investor must handle. Do not even think to start trading Forex without being able to calculate the value of a pip and unable to calculate gains and losses.
A pip is the minimum possible change in currency values
What is a Pip?
A pip is the minimum possible change in currency values. If EUR / USD moves from 1.3150 to 1.3151, that is 1 PIP. A pip is the last decimal in the price. It is through the pips should be calculated gains and losses. As each currency has its own value, it is necessary to calculate the value of a pip for each currency in particular.
In pairs where the U.S. dollar (USD) is the base currency, the calculation would be:
Take USD / JPY at 119.80 value (note that for this pair only use two decimal places, while the vast majority use four decimal places).
In the case of USD / JPY, 1 pip is equal to .01
Ie
USD / JPY:
119.80
Share price divided by .01 = pip value.
.01 / 119.80 = 0.0000834
It seems a very small number, but then we'll see how everything is relative to lot size.
USD / CHF:
1.5250
0001 divided by the quote = pip value.
.0001 / 1.5250 = 0.0000655
USD / CAD:
1.4890
0001 divided by the quote = pip value.
.0001 / 1.4890 = 0.00006715
In the case when the dollar (USD) is the base currency, and we get the dollar value of a pip, will require an additional step.
EUR / USD:
1.2200
0001 divided by the quote = pip value.
So
0.0001 / 1.2200 = EUR 0.00008196
But we want to get the dollar value, so we make a more accurate
EUR x Quote
So
0.00008196 x 1.2200 = 0.00009999 It is rounded to 0.0001.
GBP / USD:
1.7975
0001 divided by the quote = pip value.
So
0.0001 / 1.7975 = GBP 0.0000556
But we want to get the dollar value, so we make a more accurate
GBP x Quote.
So
.0000556 X 1.7975 = 0.0000998 I rounded to 0.0001.
In the next section to find out how these numbers seem insignificant can have a big impact.
What is a lot?
Forex operates in batches. The standard size of a lot is $ 100,000. There are also mini-lots are $ 10,000. And even micro-lots are $ 1,000. As we learned, currencies are measured in pips, which are the minimum increase possible. To achieve some benefit from these small increments, we need to operate large amounts of a particular currency to achieve any significant gain or loss.
Assume that we will use a standard lot of $ 100,000. We will do some calculations to see how it affects the value of a pip.
USD / JPY rate of 119.90
(.01 / 119.80) x $ 100,000 = $ 8.34 per pip
USD / CHF at a rate of 1.4555
(.0001 / 1.4555) x $ 100,000 = $ 6.87 per pip
In the case when the dollar is the first, the formula changes a bit.
EUR / USD at a rate of 1.1930
(.0001 / 1.1930) X EUR 100,000 = EUR 8.38 x 1.1930 = $ 9.99734 and rounded to $ 10 per pip.
GBP / USD at a rate of 1.8040
(.0001 / 1.8040) x GBP 100,000 = 5.54 x 1.8040 = 9.99416 and rounded to $ 10 per pip.
Depending on the broker, may have some different conventions when calculating the value of a pip on the lot size. But in any case, as market prices vary, and may be changing the value of a pip in line with the currency you are using.
How do I calculate profits and losses?
Now that we know how to calculate the value of a pip, let's see how we would calculate our earnings or losses.
Buy dollars (USD) and sell Swiss Francs (CHF).
The rate is 1.4525/1.4530. As we are buying USD, using the ask price, which es1.4530.
Buy 1 lot of $ 100,000 to 1.4530.
A few hours later, the price rose to 1.4550 and decided to close the transaction.
The new rate is 1.4550/1.4555. As we are closing the transaction, and initially made a purchase to start the operation, the same deal close a sale with the price of 1.4550.
The difference between 1.4530 and 1.4550 is 0.0020 or 20 pips.
Using our formula above, we calculate a gain of (.0001/1.4550) x $ 100,000 = $ 6.87 per pip x 20 pips = $ 137.40.
Remember that when you open a transaction, you are subject to spread is the difference between the bid / ask.
When purchased, we will use the ask price, and when sold will be used bid price.
What is Leverage?
You're probably wondering how a small investor like you could handle such large sums of money. Think of your Forex broker or broker as a bank lends you $ 100,000 to buy currencies but only asks for a $ 1000 deposit as a guarantee of good faith. Sounds too good to be true, but that's how leverage is used in Forex or other investment vehicles.
Leverage to use depends on each investor's broker.
A broker typically requires a minimum account size, which is known as the initial margin or margin account. Once deposited the money, you can perform operations on Forex. The broker also indicate how each lot will occupy them for you to put.
For example, for every $ 1000 you have, you can open a lot of operations of $ 100,000. So if you have $ 5,000, you could handle a position of $ 500.000.
The minimum security for each lot (margin) varies from broker to broker. In the example above, the broker requires a margin of 1%. This means that for every $ 100,000 invested, the broker holds a $ 1000 deposit as collateral.
What is a violation of margin or margin-call?
In the event that money in your account falls below margin requirements, the broker will close some open positions to lower the margin requirement. This prevents the account has a negative balance, even in a highly volatile and fast as the Forex.
Example # 1
Suppose you open an account with $ 2000. You put a lot of EURUSD with a margin requirement of $ 1000. The usable margin is the money available to open new positions or operating losses. As started with $ 2000, the usable margin is $ 2000. But when you open a lot, which requires a margin of $ 1000, the margin is now $ 1000.
If the loss exceeds the $ 1000 that remain in the account will incur a violation of margin.
Example # 2
Suppose you open a trade account of $ 10,000. You open 1 lot of EUR / USD, with a margin requirement of $ 1000. Remember that the margin can be used to open new positions or sustain current losses. Before opening the position, you have $ 10,000 to spare. After opening the position, he has $ 9000 of usable margin.
If your losses exceed $ 9000, will incur a violation of margin.
Make sure you know the difference between usable margin and used margin.
If the balance in your account falls below the usable margin due to loss, will have to deposit more money or the broker will close the position to limit the risks to you as to them. As a result, one can never lose more than deposited.
It is vital to know the requirements regarding the scope of the broker that you will use.
It is also important to know that most Forex brokers require more room for the weekend. It could for example up to 2%, but depends on the broker.
This theme of the margin is sometimes complicated and some indicate that it is good to have too much room. Everything depends on the individual. The important thing to remember is that you should be familiar with the policies of the broker you are using and comfortable with the risk being taken.
The relationship between leverage and the percentage of margin required can be seen as follows; Leverage = 100 / Margin Margin Percent Percent = 100 / Leverage. The gearing or leverage is usually displayed as a ratio, eg 100:1 or 200:1, while the margin is a percentage, such as 1% or 2%.
related posts
- forex trading system scalping
- slow stochastic mt4
- stochastic and macd crossover
- alternative ichimoku
- best forex indicator mt4
Take time to digest this information, as it is vital knowledge every Forex investor must handle. Do not even think to start trading Forex without being able to calculate the value of a pip and unable to calculate gains and losses.
A pip is the minimum possible change in currency values
What is a Pip?
A pip is the minimum possible change in currency values. If EUR / USD moves from 1.3150 to 1.3151, that is 1 PIP. A pip is the last decimal in the price. It is through the pips should be calculated gains and losses. As each currency has its own value, it is necessary to calculate the value of a pip for each currency in particular.
In pairs where the U.S. dollar (USD) is the base currency, the calculation would be:
Take USD / JPY at 119.80 value (note that for this pair only use two decimal places, while the vast majority use four decimal places).
In the case of USD / JPY, 1 pip is equal to .01
Ie
USD / JPY:
119.80
Share price divided by .01 = pip value.
.01 / 119.80 = 0.0000834
It seems a very small number, but then we'll see how everything is relative to lot size.
USD / CHF:
1.5250
0001 divided by the quote = pip value.
.0001 / 1.5250 = 0.0000655
USD / CAD:
1.4890
0001 divided by the quote = pip value.
.0001 / 1.4890 = 0.00006715
In the case when the dollar (USD) is the base currency, and we get the dollar value of a pip, will require an additional step.
EUR / USD:
1.2200
0001 divided by the quote = pip value.
So
0.0001 / 1.2200 = EUR 0.00008196
But we want to get the dollar value, so we make a more accurate
EUR x Quote
So
0.00008196 x 1.2200 = 0.00009999 It is rounded to 0.0001.
GBP / USD:
1.7975
0001 divided by the quote = pip value.
So
0.0001 / 1.7975 = GBP 0.0000556
But we want to get the dollar value, so we make a more accurate
GBP x Quote.
So
.0000556 X 1.7975 = 0.0000998 I rounded to 0.0001.
In the next section to find out how these numbers seem insignificant can have a big impact.
What is a lot?
Forex operates in batches. The standard size of a lot is $ 100,000. There are also mini-lots are $ 10,000. And even micro-lots are $ 1,000. As we learned, currencies are measured in pips, which are the minimum increase possible. To achieve some benefit from these small increments, we need to operate large amounts of a particular currency to achieve any significant gain or loss.
Assume that we will use a standard lot of $ 100,000. We will do some calculations to see how it affects the value of a pip.
USD / JPY rate of 119.90
(.01 / 119.80) x $ 100,000 = $ 8.34 per pip
USD / CHF at a rate of 1.4555
(.0001 / 1.4555) x $ 100,000 = $ 6.87 per pip
In the case when the dollar is the first, the formula changes a bit.
EUR / USD at a rate of 1.1930
(.0001 / 1.1930) X EUR 100,000 = EUR 8.38 x 1.1930 = $ 9.99734 and rounded to $ 10 per pip.
GBP / USD at a rate of 1.8040
(.0001 / 1.8040) x GBP 100,000 = 5.54 x 1.8040 = 9.99416 and rounded to $ 10 per pip.
Depending on the broker, may have some different conventions when calculating the value of a pip on the lot size. But in any case, as market prices vary, and may be changing the value of a pip in line with the currency you are using.
How do I calculate profits and losses?
Now that we know how to calculate the value of a pip, let's see how we would calculate our earnings or losses.
Buy dollars (USD) and sell Swiss Francs (CHF).
The rate is 1.4525/1.4530. As we are buying USD, using the ask price, which es1.4530.
Buy 1 lot of $ 100,000 to 1.4530.
A few hours later, the price rose to 1.4550 and decided to close the transaction.
The new rate is 1.4550/1.4555. As we are closing the transaction, and initially made a purchase to start the operation, the same deal close a sale with the price of 1.4550.
The difference between 1.4530 and 1.4550 is 0.0020 or 20 pips.
Using our formula above, we calculate a gain of (.0001/1.4550) x $ 100,000 = $ 6.87 per pip x 20 pips = $ 137.40.
Remember that when you open a transaction, you are subject to spread is the difference between the bid / ask.
When purchased, we will use the ask price, and when sold will be used bid price.
What is Leverage?
You're probably wondering how a small investor like you could handle such large sums of money. Think of your Forex broker or broker as a bank lends you $ 100,000 to buy currencies but only asks for a $ 1000 deposit as a guarantee of good faith. Sounds too good to be true, but that's how leverage is used in Forex or other investment vehicles.
Leverage to use depends on each investor's broker.
A broker typically requires a minimum account size, which is known as the initial margin or margin account. Once deposited the money, you can perform operations on Forex. The broker also indicate how each lot will occupy them for you to put.
For example, for every $ 1000 you have, you can open a lot of operations of $ 100,000. So if you have $ 5,000, you could handle a position of $ 500.000.
The minimum security for each lot (margin) varies from broker to broker. In the example above, the broker requires a margin of 1%. This means that for every $ 100,000 invested, the broker holds a $ 1000 deposit as collateral.
What is a violation of margin or margin-call?
In the event that money in your account falls below margin requirements, the broker will close some open positions to lower the margin requirement. This prevents the account has a negative balance, even in a highly volatile and fast as the Forex.
Example # 1
Suppose you open an account with $ 2000. You put a lot of EURUSD with a margin requirement of $ 1000. The usable margin is the money available to open new positions or operating losses. As started with $ 2000, the usable margin is $ 2000. But when you open a lot, which requires a margin of $ 1000, the margin is now $ 1000.
If the loss exceeds the $ 1000 that remain in the account will incur a violation of margin.
Example # 2
Suppose you open a trade account of $ 10,000. You open 1 lot of EUR / USD, with a margin requirement of $ 1000. Remember that the margin can be used to open new positions or sustain current losses. Before opening the position, you have $ 10,000 to spare. After opening the position, he has $ 9000 of usable margin.
If your losses exceed $ 9000, will incur a violation of margin.
Make sure you know the difference between usable margin and used margin.
If the balance in your account falls below the usable margin due to loss, will have to deposit more money or the broker will close the position to limit the risks to you as to them. As a result, one can never lose more than deposited.
It is vital to know the requirements regarding the scope of the broker that you will use.
It is also important to know that most Forex brokers require more room for the weekend. It could for example up to 2%, but depends on the broker.
This theme of the margin is sometimes complicated and some indicate that it is good to have too much room. Everything depends on the individual. The important thing to remember is that you should be familiar with the policies of the broker you are using and comfortable with the risk being taken.
The relationship between leverage and the percentage of margin required can be seen as follows; Leverage = 100 / Margin Margin Percent Percent = 100 / Leverage. The gearing or leverage is usually displayed as a ratio, eg 100:1 or 200:1, while the margin is a percentage, such as 1% or 2%.
related posts
- forex trading system scalping
- slow stochastic mt4
- stochastic and macd crossover
- alternative ichimoku
- best forex indicator mt4
Forex is simple follow the trend and you will rich.
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