A lot is the basic number of currency unit that you can buy or sell. In other words, it is the minimum available unit of currency pairs you can trade on the forex market.
There are different lot sizes available to you, however you choose based on your position, and at the broker’s instance. The lot of sizes include; the Standard size which is 100,000 units of currency, the Mini which is 10,000, the Micro lot size, which is 1000 and the Nano which is 100 units of currency.
As already discussed, a PIP is a small measure of change in a currency pair. These changes are actually determinants of profits and losses; however, trading must be conducted with substantial amount for any significant profits or losses to be recorded.
The PIP value changes in accordance with the dictates of the market at a particular time. Brokers calculate PIP value in relation to lot sizes, and they keep you updated with the PIP value of currencies traded at a particular time.
A quick example of how lot sizes affects PIP value;
For instance, if the exchange rate of the USD/JPY pair is 110.80, thus; (0.01 (a pip)/110.80(an exchange rate) X 100,000 (standard lot) = $9,03 per pip
But if the US dollar is not the base currency, its calculated quite differently; 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.
Below is an illustration of how to count your profit and lot with Lot sizes:
WHAT IS LEVERAGE?
One of the pecks of trading in the Forex market, is the idea of leverage, and how does this works, of course just very few traders will have as much as a $100,000 to trade currencies, this is where your broker comes in. your broker can provide the bulk of the money, depending on what you both must have agreed.
As a matter of practice, the broker requires a minimum deposit known as Margin. Once the Margin is deposited, the Broker completes the money to required lot size and you can now trade. In other words, ‘leveraging on the broker’s money’
NOTE: The amount of leverage you use will depend on your broker and what you feel comfortable with. Also, the Broker specifies how much margin is required to be deposited for every trade.
For example, if the permitted leverage is 100:1 (or 1% of position required), and you wanted to trade a position worth $100,000, but you only have $5,000 in your account, your broker would set aside $1,000 as a deposit(which is the Margin) and let you “borrow” the rest.
As earlier stated, there are no specific rules guiding the fixing of margin, they are at the discretion of the brokers. In the example above, the broker required a one percent margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit on the position.
At the close of the trade, you get your initial deposit back, including profits realized if any. Losses would also be deducted from your account.
How to calculate Profits and loss
For example, If we decide to trade the Japanese Yen for the US dollar JPY/USD, and the price quoted is 1.4525 / 1.4530;
if we now buy 1 standard lot (100,000 units of US dollars by selling the Japanese Yen) at 1.4530, and after a while, the price moves to 1.4550 and you decide to close your trade. The new quote for USD/JPY would now be 1.4550 / 1.4555. Since you initially bought to open the trade, to close the trade, you now must sell. You must take the “BID” price of 1.4550. The price which traders are prepared to buy at.
The difference between 1.4530 and 1.4550 is .0020 or 20 pips, using our formula from above, we now have (.0001/1.4550) x 100,000 = $6.87 per pip x 20 pips = $137.40.
NOTE: When you buy a currency, you will use the offer or ASK price and When you sell, you will use the BID price.