Understanding the Values of PIP and LOT
Values of PIP
A pip is the smallest increment in any currency pair. In EUR/USD, a movement from 1.2350 to 1.2351 is one pip, so a pip is .0001. In USD/JPY, a movement from 119.80 to 119.81 is one pip, so a pip is .01. How much in US dollars is this movement worth per 100,000 Euros in EUR/USD? How much is one pip worth per 100,000 Dollars in USD/JPY? Let’s see examples below.
Using USD/JPY as an example, we have:
.01 divided by exchange rate = pip value
.01 / 119.80 = 0.0000834
Using EUR/USD as an example, we have: 1.2350 .0001 divided by exchange rate = pip value .0001 / 1.2350 = EUR0.00008097 but we need to get back to US dollars. So we add another calculation which is EUR x Exchange rate: 0.0008097 x 1.2350 = 0.00009999 (rounded up to be 0.0001)
Note that you do not need to work all this out as your Forex brokers will work this out for you.
Value of One LOT
As spot Forex is traded in lots, the standard size for a lot is $100,000. There is also a mini lot size and that is $10,000. As you already know, currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these tiny increments, you need to trade large amounts of a particular currency in order to see any significant profit or loss.
If we are using a $100,000 lot size, the result will be (based on the above example):
USD/JPY: At an exchange rate of 119.80
1 Lot = (.01 / 119.80) x $100,000 = US$8.34 per pip
EUR/USD: At an exchange rate of 1.2350
1 Lot = (0.0001 / 1,2350) x $100,000 = EUR 8.097 1 Lot = EUR 8.097 x 1.2350 = US$9.999795 per pip (or US$10 per pip)
So if you initially buy 1 lot size of EUR/USD at quoted price of 1.2347/1.2350, and a few hour later the new quote increases to 1.2370/1.2373. If you decide to close the trade with a profit of 20 pips (you bought at 1.2350 and sold at 1.2370), you will be making profit of US$200.
Note that when you enter or exit a trade, you are subject to the spread in the bid/ask quote. When you buy a currency you will use the ask price and when you sell you will use the bid price.