A pip is defined as the least possible change in the value of a currency pair . In this case the amount of pips or points measures the difference between the entry price and the starting price in any Forex transaction. For example if the GBP / USD moves from 1.6225 to 1.6250, that is a rise of 25 pips . You can define a pip as the last decimal in the quote. It is through the pips that the gains or losses in an operation are calculated. Because each currency has its own value, it becomes necessary to calculate the value of a pip for each particular currency.
For example, in pairs where the US dollar (USD) is the base currency, such as the USD / JPY, the calculation would be as follows:
Assume that at a given time the USD / JPY has a value of 90.80 (note that for this pair only two decimals are used while for others up to four are used). For this currency pair, 1 pip is equivalent to 0.01, which means that if the pair price is at 90.80, the value of the pip would be given as follows:
Value of pip = 0.01 / quote = 0.01 / 90.80 = 0.0001101 USD / pip
It might seem that the value is almost nil, but the reality is that this is related to lot size and leverage as we will see below:
What is a lot?
When trading in the Forex market, it is done by means of lots. First we have standard size lots worth $ 100,000. Depending on the type of account and the money available that we have in that account, we can also operate through mini lots of $ 10,000 and even $ 1000 micro-balls. As explained above, the movements of the prices of the currencies are measured in pips, which constitute the smallest possible increase. In order to make a profit from these small increments, we are in the business of trading large amounts of a particular currency pair in order to make a significant profit, but it can also suffer large losses.
Forex bundles are defined in relation to the amount of money in each transaction. Depending on the amount of each lot are divided into the following types: Types of lots in the Forex
Standard lot: The lots are formed by an amount of 100 000 units of the base currency in any pair. In this case the amount that the investor must put depends on the leverage that is used. For example if it is 1: 100, to perform an operation with 1 lot the investor has to risk 1000 units of base currency. So if we trade in the EUR / USD pair with a lot and with a leverage of 1: 100, we have to risk 1000 euros. Batches are used in standard accounts.
Mini lot: A minilote on the other hand, consists of 10000 units of the base currency. In this case if we operate with a minilote using a leverage of 1: 100, this means that we risk 100 dollars from our account while the broker “lends” the rest.
Micro batch: A microlet represents in reality a 0.01 batch, that is one-hundredth of a standard batch. If we operate with microlotes and with a leverage of 1: 100, this means that at each operation we earn at least 10 dollars. With each microlote, 1000 units of the base currency of the pair are traded.