Here we going to see how we calculate profits and what is the pip value and what is the Lot Size.
These are 3 inter-related terms.
We start by revisiting the last example.
Under this example the trader made a 40 pips profit.
However the actual profit in money the trader made depends on the amount he traded.
Let us say he traded 10,000 Long EUR/USD (Bought 10,000 Euro )
(Entry) 10,000 x 1.3110 = 13,110 USD . The 10,000 Euro were bought using 13,110 USD.
(Exit) 10,000 x 1.3150 = 13,150 USD. The 10,000 Euro were later sold for 13,150 USD.
(Profit) 13,150-13,110= 40 USD. This Long trade earned a 40 USD profit.
So with 10,000 Euro the trader earned 40 USD which means every pips would worth 1 USD. When the FOREX rate moves against the trader by 1 pip his profits would be decreasing by 1 USD, while when the FOREX rate moves in favor of the trader his profits would be increasing by 1 USD . The table below shows what the profits and value per pip would had been depending on the amount traded.
We can see that profits and value per pip are calculated in the quote currency which is the USD in this case.
The value per pip is an easy way to calculate what your profit are/would be.
The value per pip depends on the Trade Volume Size and the Currency Pair you are trading.
Essentially for every 10,000 being traded the value of 1 pip is equal to 1 unit of the quote currency if the currency pair is a 4 Digit pair or 100 units of the quote currency if the currency pair is a 2 digit currency pair.
The table below shows how.
Let us now see the other example when the trade was short
What is the Lot Size ?
Lot is the unit of measurement being used to determine the volume (trade size) . Each FOREX broker may have a different size regarding what 1 lot is but the typical is the following.
1 Lot = 100,000 Units of the currency pair (the Base currency)
Hence by saying you bought 1 Lot EUR/USD means you bought 100,000 EURUSD, or equivalent you sold USD and bought 100,000 EUR.
You will also hear the terms Mini Lot and Micro Lot.
1 Mini Lot = 0.1 Lot= 10,000 Units of the currency pair (the Base currency)
1 Micro Lot = 0.01 Lot=1,000 Units of the currency pair (the Base currency)
So the value per pip for 1 lot of EUR/USD is 10 USD.