In this Wiki, we will take a look at what a "Lot" is in Forex and how you can calculate this.
What is a Lot in Forex
In the past, spot Forex was only traded in specific amounts called lots. The standard size for a lot is 100,000 units. With the advent of technology, brokers have also made available other lot sizes called mini, micro, and nano lots which are 10,000, 1,000, and 100 units respectively.
- 100,000 units = 1 Standard Lot.
- 10,000 units = 1 Mini Lot.
- 1,000 units = 1 Micro Lot.
- 100 units = 1 Nano Lot.
The change in a currency value relative to another is measured in “pips,” which is a rather small percentage of a unit of currency’s value. To take advantage of these small changes in value, you would need to trade large amounts of a particular currency in order to see any significant profit or loss.
Calculating Lot Values
In the following examples we will be using a 100,000 unit standard lot size. We will now recalculate some examples to see how it affects the pip value.
USD/JPY at an exchange rate of 119.80(.01 / 119.80) x 100,000 = $8.34 per pip.
USD/CHF at an exchange rate of 1.4555(.0001 / 1.4555) x 100,000 = $6.87 per pip.
In cases where the U.S. dollar is not quoted first, the formula is slightly different.
EUR/USD at an exchange rate of 1.1930(.0001 / 1.1930) X 100,000 = 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip.
GBP/USD at an exchange rate or 1.8040(.0001 / 1.8040) x 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip.
Keep in mind that as the market moves, so will the pip value depending on what currency you are currently trading.
How to Calculate Profit and Loss
Now that you know how to calculate pip value let’s look at how you calculate your profit or loss.
In this example, we will buy U.S. dollars and Sell Swiss francs (USD/CHF).
The rate you are quoted is 1.4525 / 1.4530. Because you are buying U.S. dollars you will be working on the “ask” price of 1.4530, or the rate at which traders are prepared to sell.
You purchase 1 standard lot (100,000 units) at 1.4530 and a few hours later the price moves to 1.4550 and you decide to close your trade. At this time the new quote for USD/CHF is 1.4550 / 1.4555. Since you’re closing your trade and you initially bought to enter the trade, you now sell in order to close the trade so you must take the “bid” price of 1.4550. The bid price is the price traders are prepared to buy the USD/CHF pair at.
The difference between 1.4530 and 1.4550 is .0020 or 20 pips. Using our previous formula, we now have (.0001/1.4550) x 100,000 = $6.87 per pip x 20 pips = $137.40.
Remember, when you enter or exit a trade, you are subject to pay the spread in the bid/offer quote. When you buy a currency, you will use the offer or ask price and when you sell, you will use the bid price.
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