Eaglesteam
New Member
Forex quotes display two ratios, a higher ask price and a lower bid price. The last two decimals are often drawn in very large print, with the smallest price increment called a pip (percentage in point). Profits and losses are calculated by the number of pips taken or lost after the position is closed. All positions start with a small loss because traders have to buy at the ask price and sell at the bid price, with the distance between the two numbers called the spread.
This is normal operating procedure because most forex brokers charge no commissions or fees for trade execution, instead relying on the bid/ask spread as their main source of income. Major currency pairs typically display narrower spreads than minor pairs but many brokers now offer fixed spreads, meaning they won’t expand and contract in reaction to market conditions, even if it’s to your advantage.
Traders need to choose a lot size for their forex positions. A lot denotes the smallest available trade size for the currency pair. $100,000 is considered a standard 100k lot when trading the U.S. dollar and used to be the smallest position allowed at many forex brokers. That’s changed with the introduction of mini lots at 10,000 units ($10,000 when trading USD) and micro lots at 1,000 units ($1,000 when trading USD).
The larger the unit size, the fewer pips needed to make a profit or take a loss. You can see how this works in the following example, in which both trades earn the same profit.
Of course, the sword cuts both ways because a long or short trade with a large unit size moving against you will generate losses more quickly than a trade with a small unit size. That means it’s important to study your new pursuit in detail before you jump in with real money and develop risk management skills that include correct position sizing, holding periods and stop loss techniques. Free pip calculators, which are widely available on the Internet, can help tremendously with this task.
This is normal operating procedure because most forex brokers charge no commissions or fees for trade execution, instead relying on the bid/ask spread as their main source of income. Major currency pairs typically display narrower spreads than minor pairs but many brokers now offer fixed spreads, meaning they won’t expand and contract in reaction to market conditions, even if it’s to your advantage.
Traders need to choose a lot size for their forex positions. A lot denotes the smallest available trade size for the currency pair. $100,000 is considered a standard 100k lot when trading the U.S. dollar and used to be the smallest position allowed at many forex brokers. That’s changed with the introduction of mini lots at 10,000 units ($10,000 when trading USD) and micro lots at 1,000 units ($1,000 when trading USD).
The larger the unit size, the fewer pips needed to make a profit or take a loss. You can see how this works in the following example, in which both trades earn the same profit.
- A standard EUR/USD pip = .00001
- You “make” 1 pip when buying $100,000 EUR/USD at 1.23000 and selling at 1.23001
- (.00001/1.23000) x 100,000 = $8.10 per pip x 1 pip = $8.10 profit
- You “make” 10 pips when buying $10,000 EUR/USD at 1.23000 and selling at 1.23010
- (.00001/1.23000) x 10,000 = 81 cents per pip x 10 pips = $8.10 profit
Of course, the sword cuts both ways because a long or short trade with a large unit size moving against you will generate losses more quickly than a trade with a small unit size. That means it’s important to study your new pursuit in detail before you jump in with real money and develop risk management skills that include correct position sizing, holding periods and stop loss techniques. Free pip calculators, which are widely available on the Internet, can help tremendously with this task.
