A lot of the time articles like to simplify the examples you see to help you understand how to trade. The following is an overview of FX in terms of profit and loss. An examination of the lot sizes and some talk about leverage with regard to profit and loss will be included. For traders the forex world can open up into a very profitable return. The downside is determining how that happens when you are new to trading. It might seem complicated from the outside and some traders even give up, but if you stick with it the chance you will make a proper return on your investment is there.
FX Lot Sizes
Most sites will have anywhere from three to five lot sizes. It starts with a nano lot at 100 units. It is rare for a broker to offer this, but some have done so. You also have a large lot size of 1 million units, which is more for international corporations, banks, and interbank system. The typical FX trader deals in micro, mini, and standard. They are 1,000, 10,000, and 100,000 respectively.
For those not aware the smallest change to a foreign exchange rate is the pip. It is .0001 of a change. This small value can provide a significant profit, but that is only when you have a large lot size to invest. Take a look at a couple of examples:
USD/JPY with a rate of 119.80 has a pip value of $8.34. This is found by taking .01/119.80 and multiplying it by the standard lot size of 100,000.
USD/CHF with a rate of 1.4555 would then be .0001/1.4555 x 100,000 to get a pip value of $6.87. Note the .0001 and .01. The JPY rate is always two decimal places, while other pairs are 4 numbers.
If you have the EUR/USD then the calculation is different in FX. It is EUR/USD rate of 1.1930 in which .0001/1.1930 x 100,000 = 8.38 x 1.1930= $9.99 or $10 pip value. The USD when there is a lot size of 100,000 is always $10 as the quote currency. If you trade 10,000 units you would see $1 for the USD pip value.
FX Leverage to Make the Lot Size
You have the concept of lot sizes and pip value. Now is the time to look at FX in terms of leverage. Leverage like 100:1 is 1% of the position you want to open. If you want to trade 100,000 and you have 5,000 in your account it is difficult to make the trade, right? Leverage provides you that chance by allowing you to keep a margin balance in your account. With a 1% margin you can have $1,000 in your account and borrow the rest of the standard lot size. Any profit or loss in the FX market will come out of the balance you have in your account. Margin call happens when all available funds in your account are used due to losses. The trade closes to prevent your account going into a negative amount.