Understanding pips, lots, position size

Beginner
AvramisDespotis
3 Lessons
6 Hours

Understanding pips, lots, position size

Welcome to Understanding Pips, Lots and Position Size! In this video, you will learn what pips, spread, and lots are, how to calculate profit and loss, and the different types of orders.

Pips

A pip or point in price is the smallest price change any given exchange rate can make. For other instruments like indices and shares, the minimum price movement is called a tick. For currencies, it is usually the 4th decimal point of the price.

If we consider the price of EUR/USD, say 1.1358, the next price it can have is 1.1359. The difference is 0.0001, or in other words, 1 pip. Some platforms, however, offer prices in 5 decimal points. So if the price is 1.13575, and the next price is 1.13590, the difference is 0.00015, or in other words, 1.5 pips.

US Dollar pairs and other currency pairs are quoted in 4 or sometimes 5 decimal points. For example, the EUR/USD is quoted 1.1958, and sometimes 1.19582. All Japanese Yen pairs, on the other hand, are an exception as they are quoted in 2, or sometimes 3 decimal points. For example, the EUR/JPY is quoted 110.45, and sometimes 110.454.

Bid, Ask, and Spread

Instruments are quoted in bid and ask prices. Bid is the price at which you can sell the instrument. The ask is the price at which you can buy the instrument, and the bid price is always lower than the ask price.

The difference between the bid and the ask price is the spread and it represents the cost of the transaction. In our example, the spread is 1 pip on the EUR/USD, 2 pips on the British pound, 1 pip on the dollar yen, 0.4 dollars on gold, 55 dollars on bitcoin, 0.8 units on US500, and 0.2 dollars on Facebook. As you might have noticed, the spread varies from one instrument to another.

Lots

On the MT4 and MT5 trading platforms, instruments are always traded in specific amounts called lots. Its equivalent standard lot and micro lot depend on the type of instrument.

In Forex, 1 standard lot is 100,000 units of the base currency, and 1 micro lot is 1,000 units. For EUR/USD, 1 standard lot is 100,000 Euros and 1 micro lot is 1,000 Euros. For GBP/USD, 1 standard lot is 100,000 British Pounds and 1 micro lot is 1,000 British Pounds. For USD/JPY, 1 standard lot is 100,000 US Dollars and 1 micro lot is 1,000 US Dollars.

In commodities, stocks, and other instruments, a lot represents the number of units of that instrument. For gold, 1 standard lot is 100 ounces, and 1 micro lot is 1 ounce.

For some instruments, the standard lot and the micro lot are the same. For Bitcoin, 1 lot is 1 coin. For the US500 index, 1 lot is 1 unit of the index. For Facebook shares, 1 lot is 10 Facebook shares.

These are summarized in the table below.

Instrument

Equivalent of 1 standard lot

Equivalent of 1 micro lot

Forex

100,000 units of the base currency

1,000 units of the base currency

EUR/USD

100,000 Euros

1,000 Euros

USD/JPY

100,000 US Dollars

1,000 US Dollars

Gold

100 ounces

1 ounce

Bitcoin

1 coin

-

US500

1 unit of the index

-

Facebook share

10 shares

-

Calculating for Profit and Loss

Forex

profit total profit

equivalent of 1 standard lot of US Dollars

profit total profit

equivalent of 1 standard lot of US Dollars

Buy 1 standard lot of EUR/USD at 1.1358 Sell at 1.1373 1.373 – 1.1358 = 0.0015 or 15 pips

0.0015 x 100,000 = 150 dollars

When the USD is the base currency, your profit or loss will be floating. If you buy 1 standard lot of USD/JPY at 110.50 and sell it back when it reaches 110.90, you will earn 0.40 or 40 pips. By multiplying this number by the lot size, you will get your profit in the quote currency, which in here is 40,000 Japanese Yen. To convert 40,000 Japanese Yen to US Dollars, you will simply need to divide the profit by the closing rate of the trade (in this case, 110.90), the net amounts to 360.68 US Dollars.

Commodities

loss total loss

equivalent of 1 standard lot of gold

loss total loss

equivalent of 1 standard lot of gold

Buy 1 standard lot of gold at 1205 dollars Sell at 1200 dollars 1200 – 1205 = -5 (or 5-dollar loss)

5 x 100,000 = 500 dollars

Shares

In shares, profits and losses are calculated by multiplying the amount traded with the dollars gained or lost. If you buy 15 lots of Facebook CFDs at the price of 177 dollars and sell them at 178.1 dollars, you will gain 1.10 dollars per share. The profit or loss is calculated by multiplying the dollars gained or lost by the amount traded. As one lot is equal to 10 shares, your profit is equal to 1.1 dollars multiplied by 15 lots multiplied by 10 shares, which amounts to 165 dollars.

profit total profit

number of lots bought equivalent of 1 standard lot of Facebook share

profit total profit

number of lots bought equivalent of 1 standard lot of Facebook share

Buy 15 lots of Facebook CFDs at 177 dollars Sell at 178.1 dollars 178.1 – 177 = 1.10 dollars

1.10 x (15 x 10) = 165 dollars

Indices

profit total profit

number of lots bought equivalent of 1 standard lot of 1 unit of index

profit total profit

number of lots bought equivalent of 1 standard lot of 1 unit of index

Buy 100 lots of the US500 index at 2644 dollars Sell at 2660 dollars 2660 – 2644 = 16 points

16 x (100 x 1) = 1600 dollars

Types of Orders

A market order is the most basic and common type of order. This type of order executes the trade at the best available price at the time the order is received. You may use the market order to enter a new position or to exit an existing one. Bid price is the best available price to sell at and ask price is the best available price to buy at. Prices always display the highest bid and the lowest ask available

In addition to market orders, traders can place pending orders. Pending orders are orders that will be executed when the price reaches a pre-determined level. They are categorized into limit orders and stop orders. A sell limit order is used to sell higher than the current market price and a sell stop order is used to sell lower than the current market price

Buy Limit, Buy Stop, and Trailing Stop

Buy limit is used to buy lower than the current market price and buy stop is used to buy higher than the current market price. A trailing stop is a stop order that is set based on a predefined number of pips away from the current market price. A trailing stop will automatically trail your stop loss as the market moves in your favor and maintain its level when the market corrects in the opposite direction to protect your profits. If the market moves against you by the predefined number of pips, then a market order is triggered, and the stop order is executed closing the open position.

Recap!

Pip

The smallest price change any given exchange rate can make; also known as point in price.

Instrument

An asset or negotiable item that can be traded (e.g. currency, shares)

Bid

The price at which you can sell the instrument.

Ask

The price at which you can buy the instrument.

Spread

The difference between the bid price and the ask price.

MT4, MT5

MT4, also known as MetaTrader4 and MT5, also known as MetaTrader 5, are two of the most popular trading platforms.

Lots

Specific amounts instruments are traded in (e.g. 1 standard lot of USD is equal to 100,000 USD)

Market order

A type of order that executes the trade at the best available price at the time the order is received.

Pending order

A type of order that will be executed when the price reaches a pre-determined level.

Buy limit

Used to buy lower than the current market price.

Buy stop

Used to buy higher than the current market price.

Trailing stop

A type of stop order that is set based on a predefined number of pips away from the current market stop.

Calculating for profit and loss

(PROFIT/LOSS) x (NUMBER OF LOTS BOUGHT) x (EQUIVALENT OF LOT) = TOTAL PROFIT/LOSS

In the next video, we will talk about leverage and margin. Thank you for watching!