How to Calculate Lots & Pips in Crypto and Forex Trading
Within the world of Forex trading, two very basic concepts govern the scene: Lots and Pips. Any trader, new or seasoned, should understand these terms if he wants to make a killing in the Forex market.
The paper explains lots and pips, how they work, and why they are important for any informed trading decision one may make. Today, we will focus mainly on Forex, but you can still apply this idea in Crypto trading if you are trading crypto
Table of Contents
Understanding Lots
In Forex trading, a lot refers to the size of trade one is making. It’s the amount of currency one buys or sells in any particular transaction. Lots can be of different sizes, and they can affect seriously how one strategies and controls risk while trading.
Four main types of lots sizes
Standard Lot: This is the most common lot size, equating to 100,000 units of the base currency. For example, if one was trading EUR/USD, this would be 100,000 euros.
Mini Lot: One-tenth of a standard lot or 10,000 units of the base currency; it is also a very popular lot size among traders who want to keep their positions small for risk management.
Micro Lot: It is one hundredth of the standard lot or 1,000 units of base currency. It is perfect for most entry-level traders who want to trade with very little risk.
Nana Lot: A nano lot is one-thousandth of a standard lot, equivalent to 100 units of the base currency. Not so common a size but available with some brokers.
Knowing the lot sizes is very important, as it directly impacts the amount of money you could possibly gain or lose in a trade. The lot size is directly proportional to the amount of potential profit—but on the other hand, so is risk.
What are Pips in Forex Trading?
A pip is the small price movement of currency in the Forex market. It usually occurs at the fourth decimal place in the currency quotation. For example, if the EUR/USD pair moves from 1.1000 to 1.1001, that one-point movement is called a pip.
Pips, in Forex trading, measure the change in currency pairs. These changes are very important in calculating profit and loss.
Standard Pip Value: Most currency pair pips are 0.0001. However, due to the lower value of the yen, usually a pip is 0.01 when JPY is involved in a currency pair.
It’s because of this that pip value computation, by itself, depends on the size of lots you are trading. For example, one pip in a standard lot of EURUSD will be $10. In a mini lot, one pip is equivalent to $1, and in a micro lot, one pip is equivalent to $0.10.
Pipettes: Some brokers quote prices with an additional decimal place, which is referred to as a pipette. It is then one-tenth of a pip, so more precise pricing is allowed for.
Understanding what a pip is and how much it is worth will help in managing your trades. It helps to show how much a pip is worth in setting stop-loss and take-profit levels to be applied in your risk and profit maximization strategies.
How to Calculate Pip Value
Pip value is compose of Pips and Lots, its all about how much you are going to make for each pip movement in dollar or any other currency, this is all about the up and down movement of the market
For example, we have USD/CAD = 1.35251. This is the exchange rate
Then One lot contract value = 100,000 USD * 1.35251 = 135,251$ CAD. 100,000 is the base currency, which is your deposited amount
Note that, Pip value is the profit/loss for 1 Pip movement
- If price goes up to 1.35261
- Then Contract value = 100,000 USD * 1.35251 = 135,261$ CAD
- Pip value = 135,261 – 135,251 = $10 CAD
- In base currency, this is equal 10/1.35251 = 7.39
Note that Pip value is always in quote currency
Value of pip is based on how many lots are taken, which is the size of the lots your are risking.
The short formula of calculating Pip value is: Lots * 10. In case you have 10,000 USD base currency, this will give you 0.1 lots, when multiplying this with 10, you will be making 1$ per pip move. 0.1*10 = $1
Why Lots and Pips Matter in Forex Trading
The concepts of lots and pips are pretty much intertwined and form an important part of your trading strategy. Here is why they are so important:
Risk Management: Knowing the size of a lot and the value of a pip helps you understand how much risk might be involved in a potential trade. These metrics will define how much money you are ready to lose with every trade, enabling you to set stop orders.
Calculations of Profits: A pip is a standardized unit for the amount by which forex pairs may move. The value of a pip, when known to your lots, will help in pre-estimating the amount of profit or loss likely to be incurred from a trade.
Trading Strategy: A lot of the trading strategies can be implemented in different lot sizes. For example, you can use a larger lot on trades with which you are more confident and a smaller lot on more speculative trades.
Broker Requirements: The lot sizes and pip values differ across different brokers. You should know how to select a broker who will best suit your style of trading.
