We have already seen that in forex currencies are bought and sold in pairs, so the idea is to exchange between currencies, waiting for the price of this exchange to vary in our favor.
Let’s take an example that makes everything easier to understand:
Suppose you have an account in USD and that with these USD you buy 10,000 euros. If the price of the current EUR / USD pair is 1.2500 to buy € 1 you must pay $ 1.25, or what is the same, if you sell € 1 they pay you $ 1.25. Therefore, the 10,000 EUR costs you 12,500 USD.
In three days the price of the EUR / USD pair is at 1.3220, you decide to sell the 10,000 euros that you bought (close the purchase operation that you opened three days ago). By doing so, you get $ 13,220, with a difference in your favor of $ 720.
Let’s stop for a moment, how is the listed price interpreted?
Take, for example, the price for the EUR / USD pair of 1.3220. This is the exchange ratio between the currencies that make up the pair.
The first currency is called the base currency, and the exchange ratio (quote price) is the amount of the second currency you need to buy one unit of the base currency. In our example, the price of 1.3220 of the EUR / USD pair means that we need 1.322 US dollars to obtain one euro, or, what is the same, with one euro you can buy 1.322 dollars.
Therefore, the trading price of a currency pair, the given exchange ratio, indicates the amount of counter currency required to acquire one unit of the base currency of the pair.
Is it the same when you buy as when you sell? Yes, changing the order terms. When selling, the exchange ratio indicates the number of units of counter currency that you get when selling a unit of base currency. In our example it indicates that you get $ 1,322 when you sell 1 EUR.
With everything seen so far, you should be clear that forex operations basically mean the purchase of one currency and the simultaneous sale of another, or vice versa.
If you buy in the EUR / USD pair, it means that you buy euros and sell dollars, if you sell EUR / USD it means that you sell euros and buy dollars. Note that the currency that we have called the base of the pair is the base of the operation. Now, what should I do, sell or buy in a certain pair? You must buy ( go long ) in a pair if you think the exchange ratio will go up and sell ( go short ) if you think it will go down, making the decision, as you can see, involves a forecast for the future and for this They use analysis tools that we will see throughout the eliteforexnews course.
- If you decide to buy what you hope is that the base currency acquires more value than the opposite currency of the pair, that is, that its exchange ratio goes up.
- If you decide to sell, what you want is that the base currency devalues and has less value than the opposite currency of the pair in which you go short, that the exchange ratio of the pair goes down.
Calculating Profit: Pip and Lot
You have probably already heard the term pip (points) and lot. Let’s do some math.
- The pip:The number of pips or points measures the difference between the entry price and the exit price in a trade. So if you have entered a purchase in EUR / USD at 1.2500 and you leave at 1.3220, the amount of pips obtained is +720, if this same operation had been a sale, the number of pips would have been -720. If you look at the quote price, you can see that in this case the minimum variation that can occur is 0.0001 and this will be 1pip, making the difference 1.3220 (output) – 1.2500 (input) = 0.0720, we obtain 720 positive points. In other pairs with the listed price to two decimal places the minimum price change will be 0.01, such as USD / JPY, the price of this pair is of the form 99.27. So the value of a pip is the minimum spread between the price at which a trade is made
- The lot: To pass the amount of pips to money won or lost, it is necessary to know the volume of the operation, that is, the number of lots with which the purchase or sale has been made in a currency pair. A standard lot equals 100,000 base currency units, mini-lot 10,000, and micro-lots 1,000.
Let’s calculate the profit if you have obtained +20 pips in a trade performed with a mini-lot in EUR / USD, the trade was buy at 1.3230 and it was closed at 1.3250. Look what it means: you bought euros and when you closed the deal you sold them. The minimum increment (1 pip) is 0.0001, if its quoted price when exiting the operation is 1.3250, the profit per pip will be: (0.0001 / 1.3250) * 10.000 = 0.75. Now, you have sold euros so this result is expressed in euros, normally your account will be in USD, we need one more calculation to convert it to USD, 0.75 euro / pip * 1.3250 usd / euro = 0.9973 usd / pipthat when adjusting will be 1 and from here the typical thing that you may have heard: when you operate with a minilot you get 1 dollar per pip. Beware this only in pairs in which the USD is not the base currency. In our 20 pip operation we will have achieved 20 USD.
In pairs where USD is the base currency, it is calculated exactly the same: USD / JPY at 99.30. Value of a pip: 0.01 / 99.30 = 0.0001007 USD, as the base currency is USD this value is already in USD. This is multiplied by the number of lots and it will give you the profit per pip of a certain trade.
All this I have to do ??? Of course not, these calculations are performed automatically on the trading platform, you don’t have to do them, but it is essential to understand what the numbers that appear on your trading platform mean.
Note : There are brokers that have entered one more decimal in the listing prices, for example, the EUR / USD in these brokers can trade at 1.32255. These listing prices do not represent the consensus. If your broker offers you this type of price, you must take into account the standard quote when making the calculations. In this way, if the EUR / USD varies from 1.32255 to 1.32270 your platform may show you a change of 15 pips, but it is not 15 real pips but 1.5 !!!