To recap slightly, you have a definition of what forex trading is, the players involved, when to trade, and what to trade. Now, it is time to discuss how you calculate profit and loss, by understanding what a pip is, the pip spread, and how you determine your profit.
Most currency pairs are written in a format to the 1/100 or 1 percent. For example, 1.1167 is a quote price for a currency pair. You would not see 1.116 as a quote price. The smallest pip 0.0001 or 1 pip is where you can make a significant profit, depending on the size of the trade you place.
Asian currencies can differ in how they are written. If you see USD/JPY prices, it might read something similar to 101.3400.
The JPY and certain other Asian currencies seem like they hold more value, but remember the base currency is 1, so 1 USD = 101.3400 JPY. For one of your dollars, you gain over 100 yen. But, you have to understand what this means in terms of actual physical value.
In a vending machine, the price for a Coke is usually JPY 150. So, if you only have 1 USD and convert to 101.3400 you do not have enough for a Coke. You would need $1.50 in USD at least to make JPY 150, with a little change left over. So, while it seems that you gain more funds in Asian currencies, it is actually based on the true value of the Yen when purchasing items.
Now that you know 1 pip is represented as 0.0001 in a quote, then you can understand when you read there is a 5 pip spread between the bid and ask price. You will see a sell price of 1.1167, but a buy price of 1.1162. It is the 5 pips in between or the pip spread that makes a broker their money.
Since you don’t truly care how the profit is made for a broker, just know that you want to find a competitive pip spread or fee charged for your transactions. To do that you need to know the value of 1 pip in a currency you are trading.
First, we need to understand lot sizes. You are only able to trade in certain lot sizes: nano, mini, standard, and large. A nano lot size is $1,000, a mini lot size is $10,000, and a standard lot size is $100,000. The next size is 1 million in your domestic currency.
For example, let’s say you are looking at EUR/USD. We will use a mini lot size of 10,000. Multiply 10,000 by 0.0001 and you will see that each pip is worth $1. This will not work for JPY pairs. If you do the same calculation with USD/JPY, a pip is worth 0.98689. If you trade with a lot size of 100.000, then the value of each pip, when the USD is the quote currency will be $10. If the USD is the base currency, then the value will change. For instance, the USD/CAD provides a pip value of 0.7619.
What you need to know is that whenever the USD is the quote currency the pip will be worth $1, $10, or $100 based on the lot size. A mini size will not be worth more than 0.1 when the USD is the quote currency.
Given the low value of pips in a nano lot, most brokers will not offer such a tiny option, but there are traders who do not have a lot of capital to begin and do not mind gaining a small profit with each trade as they work up to affording mini lots.
Calculating your Profit or Loss
Since you are now aware of the cost of a pip, you can start to determine the profit or loss on a trade.
Given the low value of pips in a nano lot, most brokers will not offer such a tiny option, but there are traders who do not have a lot of capital to begin and do not mind gaining a small profit with each trade as they work up to affording mini lots.
Calculating your Profit or Loss
Since you are now aware of the cost of a pip, you can start to determine the profit or loss on a trade.
The first thing to remember is that when you open a new position/trade, you are either buying or selling. You have to close that position/trade in order to make a profit. If it remains open, then you have not made a profit or loss yet. It is just like the stock market, where you purchase shares, then sell those shares and calculate the difference between the open trade and the closed trade.
Let’s say you invested in the decrease in value for the USD, meaning you bought in at 1.1162 and closed the position at 1.1172. You used 10,000 as your lot size. You can be really complicated in the calculation or since you know that each pip in 10,000 lot sizes, is worth $1, you can determine the difference in pips. 1.1172-1.1162 is 0.0010. You know that 1 pip equals $1, so if you saw a pip movement of 0.0010, then you gained 10 pips, so 1x10 means you have gained a profit of 10 pips.
Of course, there is the pip spread to account for, which pretty much means you break even when you place two transactions and only earn $10. The
point is that with certain knowns, you can quickly see if you are making a profit, breaking even, or suffering a loss.
Your strategies should be designed around a profit of about 60 percent to 40 percent loss when you begin. As you gain more knowledge and test out different strategies to fit your trading style, you will increase the profit/loss ratio to 90/10.
NOTE: it takes work. You will not immediately see an increase in your profit/loss ratio. You may not always trade with a 90/10 split either. There are many factors that determine if you gain a profit at the end of the year. Your overall outlook has to be for the year, not the month. You will soon learn there are mistakes new traders make that quickly sour their hopes of trading for better retirement savings. People who talk bad about investing in any area have been burned by their own mistakes. You can avoid these and save yourself a lot of psychological trouble by learning how to trade properly.
Most currency pairs are written in a format to the 1/100 or 1 percent. For example, 1.1167 is a quote price for a currency pair. You would not see 1.116 as a quote price. The smallest pip 0.0001 or 1 pip is where you can make a significant profit, depending on the size of the trade you place.
Asian currencies can differ in how they are written. If you see USD/JPY prices, it might read something similar to 101.3400.
The JPY and certain other Asian currencies seem like they hold more value, but remember the base currency is 1, so 1 USD = 101.3400 JPY. For one of your dollars, you gain over 100 yen. But, you have to understand what this means in terms of actual physical value.
In a vending machine, the price for a Coke is usually JPY 150. So, if you only have 1 USD and convert to 101.3400 you do not have enough for a Coke. You would need $1.50 in USD at least to make JPY 150, with a little change left over. So, while it seems that you gain more funds in Asian currencies, it is actually based on the true value of the Yen when purchasing items.
Now that you know 1 pip is represented as 0.0001 in a quote, then you can understand when you read there is a 5 pip spread between the bid and ask price. You will see a sell price of 1.1167, but a buy price of 1.1162. It is the 5 pips in between or the pip spread that makes a broker their money.
Since you don’t truly care how the profit is made for a broker, just know that you want to find a competitive pip spread or fee charged for your transactions. To do that you need to know the value of 1 pip in a currency you are trading.
First, we need to understand lot sizes. You are only able to trade in certain lot sizes: nano, mini, standard, and large. A nano lot size is $1,000, a mini lot size is $10,000, and a standard lot size is $100,000. The next size is 1 million in your domestic currency.
For example, let’s say you are looking at EUR/USD. We will use a mini lot size of 10,000. Multiply 10,000 by 0.0001 and you will see that each pip is worth $1. This will not work for JPY pairs. If you do the same calculation with USD/JPY, a pip is worth 0.98689. If you trade with a lot size of 100.000, then the value of each pip, when the USD is the quote currency will be $10. If the USD is the base currency, then the value will change. For instance, the USD/CAD provides a pip value of 0.7619.
What you need to know is that whenever the USD is the quote currency the pip will be worth $1, $10, or $100 based on the lot size. A mini size will not be worth more than 0.1 when the USD is the quote currency.
Given the low value of pips in a nano lot, most brokers will not offer such a tiny option, but there are traders who do not have a lot of capital to begin and do not mind gaining a small profit with each trade as they work up to affording mini lots.
Calculating your Profit or Loss
Since you are now aware of the cost of a pip, you can start to determine the profit or loss on a trade.
Given the low value of pips in a nano lot, most brokers will not offer such a tiny option, but there are traders who do not have a lot of capital to begin and do not mind gaining a small profit with each trade as they work up to affording mini lots.
Calculating your Profit or Loss
Since you are now aware of the cost of a pip, you can start to determine the profit or loss on a trade.
The first thing to remember is that when you open a new position/trade, you are either buying or selling. You have to close that position/trade in order to make a profit. If it remains open, then you have not made a profit or loss yet. It is just like the stock market, where you purchase shares, then sell those shares and calculate the difference between the open trade and the closed trade.
Let’s say you invested in the decrease in value for the USD, meaning you bought in at 1.1162 and closed the position at 1.1172. You used 10,000 as your lot size. You can be really complicated in the calculation or since you know that each pip in 10,000 lot sizes, is worth $1, you can determine the difference in pips. 1.1172-1.1162 is 0.0010. You know that 1 pip equals $1, so if you saw a pip movement of 0.0010, then you gained 10 pips, so 1x10 means you have gained a profit of 10 pips.
Of course, there is the pip spread to account for, which pretty much means you break even when you place two transactions and only earn $10. The
point is that with certain knowns, you can quickly see if you are making a profit, breaking even, or suffering a loss.
Your strategies should be designed around a profit of about 60 percent to 40 percent loss when you begin. As you gain more knowledge and test out different strategies to fit your trading style, you will increase the profit/loss ratio to 90/10.
NOTE: it takes work. You will not immediately see an increase in your profit/loss ratio. You may not always trade with a 90/10 split either. There are many factors that determine if you gain a profit at the end of the year. Your overall outlook has to be for the year, not the month. You will soon learn there are mistakes new traders make that quickly sour their hopes of trading for better retirement savings. People who talk bad about investing in any area have been burned by their own mistakes. You can avoid these and save yourself a lot of psychological trouble by learning how to trade properly.
