Trading currencies involves more than technical knowledge and up to date information regarding market news and events. Each trade has its own numeric particularities, which will determine your profit/loss depending on several factors, such as the position size, pip value, spread, and leverage. This guide will explain in three examples how you can manage your buy/sell trades in order to successfully achieve the expected results for each one of them.
In our first example, we are going to buy a mini-lot of the EUR/CHF pair (euro vs. Swiss franc). Buying this pair means that we are expecting the euro to gain value against the Swiss currency. Considering this order to be worth 10,000 EUR we can use a simple calculation to determine the amount of euros in one pip of profit or loss. Here are the numbers:
The EUR/CHF long (buying) price is at 1.0923 and 0.0001 is one pip. To determine the value of one pip from 10,000 EUR we have to do the following:
(Pip size / pair's Ask price) × order size
In this case, it would be:
(0.0001 / 1.0923) × 10000 = 0.92 euro
It is very important to stress on the pip value, since can be tricky enough to the point any distraction may lead the trader to make mistakes. The same position sizes when trading different pairs can affect drastically the pip value, and by consequence, your profit/loss ratio.
Lets consider you could have closed your market order at 1.0941. How can we calculate our profit?
From 1.0923 to 1.0941 we have a profit of 18 pips. Our pip value as mentioned above is 0.92 euro cents, giving us a final sum of 0.92 × 18 = 16.56 euro. Taking into account that we had a 1 pip spread when opening our order, the currency rate actually had to move 19 pips up for us to book a profit of 18 pips. That is because we close the buy trades using the Bid price vs. the Ask price used for opening long positions.
The second example will stress on the effectiveness of scalping within a low-spread market. The pip spread value may vary from one broker to another, and generally, different moments and events affect the spread size directly. Normally the pair with the lowest spread size is the EUR/USD, and considering that scalps normally have small pip profits, using a high leverage is the key to have substantial profits while scalping.
Lets imagine the following values for the EUR/USD. The Bid/Ask rates are 1.1044/1.1045, with a one pip spread size. If you have at least $1,1045 in your account (preferably more) and a leverage of 1:100, you can trade lots worth up to 100,000 EUR (exactly 1 standard lot of EUR/USD), which in this case would mean a 30 USD profit for a 3 pips positive closed market order.
Our final example will approach a strategy for avoiding losses while trading Forex. The same value for the EUR/USD from the second example can be used for this example, selling the EUR/USD at 1.1044, and remembering that your target price would probably be achieved after a period in which you may not be able to verify the order constantly, it is wise to set a stop-loss value to the next support/resistance point, which for the sake of example, would be 1.1080. The lot size is equivalent to 10,000 EUR, giving a pip value of $1.00 USD. Market events and political decisions may have a strong influence on the currency pairs, so imagining that a favorable decision for the USD made the pair go to 1.1150, your stop-loss helped you to avoid losing extra 70 dollars, giving you a much less significant loss than if you would not have set a stop-loss price for the order.