How To Understand And Calculate Forex Trade Sizes
Let’s face it. Actual forex trade sizes can be quite confusing. First, you’ve got to understand the terminology being used, and then you need to learn how to read and interpret the all the figures shown in the results.
In achieving a better understanding of the results, the first thing you need to focus on is the exchange rate. Typical exchange rate listings you may come across in a newspaper are two decimal places in length, while forex exchange rate listings are typically 4 decimal places long.
With a four decimal point readout, the smallest possible amount is $0.0001. This is known as point or pip and both are short for “Price Interest Points”.
If someone tells you that a particular currency increased by 5 pips, that would tell you that it actually increased by an amount of $0.0005. Because many of the trades in the forex market can be very large in size, it doesn’t take many pip’s to significantly impact your profit position. For example, for a $100,000 investment, each additional pip would be worth $10 and an increase of 10 pips would provide you with a $100 profit.
Also keep in mind that the pip value can vary from one currency to the next. In the above example, we are discussing pips in USD. With another currency, the pip may vary depending on how the particular currency is actually being traded.
It’s unlikely that you will remember all the different pip values by currency, but don’t worry, this level of information retention is not essential to be able to trade forex. What we’re discussing here is the basic language of forex trading to help you get a better grasp of the size of trades and how they are relevant to an actual profit or loss position.
Typically, for your most commonly traded currencies, the pip’s will come automatically to you. For currencies that you trade less often, there will likely be a need for you to look them up when required.
The relevance of pips to trade size has to do with the size of lots you are allowed to purchase for a particular currency. If you are trading in U.S. dollars as the currency you’re trading into, or secondary currency, then the pip value is always $10 per lot or $100,000, and $1 per mini lot, or $10,000.
With this information in hand, you are now in a better position to what amount you are comfortable investing and in what currency you chose to invest.
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