How to Trade - Trading Pips
As you already know from Forex Trading Floors Learn To Trade Pips, 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.
Let's assume we will be using a 100,000 unit (standard) lot size. We will now recalculate some examples to see how it affects the pip value.
Let’s assume we want to trade EUR/USD with an 8 pip stop and our account balance is £1608.09
We need to know the following information before we start.
The currency in which our account is based. (GBP)
Our account size. (£1608.09)
The stop loss in pips that we wish to use. (I.E. 8 pips)
The exchange rate for our account currency and against the terms currency that we wish to trade.
We know from our earlier posts on Forex Trading Floors Learn to Trade training that the base currency is the first currency quoted in the currency pair and that it is equal to one. Therefore if we are trading EUR/USD we need to know the rate for GBP/USD. (If we wanted to trade AUS/NZD we would need to know the GBP/NZD rate.)
As the GBP/USD currency pair is quoted in 4 decimal places we need to divide the current price for the GBP/USD into 0.0001
GBP/USD at an exchange rate of 1.5251 (.0001 / 1.5251) X 100,000 = 6.56, this then gives us the Lot Price.
We then divide the value of our price per pip by the Lot price to give us the trade size in Lots