What is a Lot in Forex?

 

In the previous article we went over what a pip is and how to calculate the value of a pip. We got an extremely low pip value, an example being USD/CHF where one pip was worth $0.00009250.

 

So, $0.00009250 is the value of a pip per unit and the standard size of a lot is 100,000 units of the base currency.You need to buy or sell one or more lots to open a trade. Let’s say you open a long trade with one standard lot on USD/CHF and buy 100,000 units. We know one pip per unit is $0.00009250 so all we need to do is multiply! $0.00009250 X 100,000 = $9.25 USD.

 

$9.25 per pip may sound like quite a lot. Don’t worry, there are several different lot sizes in Forex:

 

  •      Standard lot = 100,000 units of base currency

 

  •      Mini lot = 10,000 units of base currency

 

  •      Micro lot = 1,000 units of base currency

 

  •      Nano lot = 100 units of base currency

 

Nano and micro lots are great for trading Forex without risking too much money. You don’t want to be trading standard lots when you first start out trading. If each pip is worth $9 and you lose a 100 pip trade, that is $900 down the drain. You can learn to trade without risking your life savings.

 

Now you can calculate the value of a pip per lot. The pip value we calculated in the previous article was based on a single unit. So, for every unit traded on a GBP/USD trade a pip is worth $0.00009998 USD. With a mini lot you have 10,000 units open. Each pip will be worth $0.9998 USD. Calculating how much you will make per pip on a trade is straightforward.

 

First step: Calculate the per unit value of a pip.

 

USD/JPY = 96.27

 
0.01 / 96.27= 0.0001038 1 pip = 0.0001038 USD per unit

 

Second step: Multiply the per unit value by the lot size you are using.

 
0.0001038 USD x 10,000 units = 1.038 USD

 

If you want the pip value in USD but it is not the base currency, the formula looks a little different.

 

First step: Calculate the per unit value of a pip.

 

GBP/USD = 1.6443

 
0.0001 / 1.6443= 0.00006081 1 PIP = 0.00006081 GBP

 

Second step: Multiply the per unit value by the lot size you are using.

 
0.00006081 USD x 10,000 units = 0.6081 GBP

 

Third step: Multiply the value per pip by the rate of the pair.

 
0.6081 GBP x 1.6443 = 0.9998 USD

 

Round this up to $1 per pip.

 

These numbers still don’t seem very good though. Why would you want to invest $10,000 and earn only $1 per pip? Well, that is where leverage comes into play.