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1. Pip

A pip is a standardized unit and is the smallest amount by which a currency quote can change.

The unit of measurement to express the change in value between two currencies is called a “pip.” If EUR/USD moves from 1.2250 to 1.2251, that 0.0001 USD rise in value is ONE PIP. A pip is usually the last decimal place of a quotation. Most pairs go out to 4 decimal places, but there are some exceptions like Japanese Yen pairs (they go out to two decimal places).

As each currency has its own relative value, it’s necessary to calculate the value of a pip for that particular currency pair. In the following example, we will use a quote with 4 decimal places. For the purpose of better explaining the calculations, exchange rates will be expressed as a ratio (i.e., EUR/USD at 1.2500 will be written as “1 EUR/ 1.2500 USD”)

Example exchange rate ratio: USD/CAD = 1.0200. To be read as 1 USD to 1.0200 CAD (or 1 USD/1.0200 CAD)

(The value change in counter currency) times the exchange rate ratio = pip value (in terms of the base currency)

[.0001 CAD] x [1 USD/1.0200 CAD]

Or Simply

[(.0001 CAD) / (1.0200 CAD)] x 1 USD = 0.00009804 USD per unit traded

Using this example, if we traded 10,000 units of USD/CAD, then a one pip change to the exchange rate would be approximately a 0.98 USD change in the position value (10,000 units x 0.0000984 USD/unit). (We use “approximately” because as the exchange rate changes, so does the value of each pip move)

2. Lot

In the past, spot forex was only traded in specific amounts called lots, or basically the number of currency units you will buy or sell.

The standard size for a lot is 100,000 units of currency, and now, there are also mini, micro, and nano lot sizes that are 10,000, 1,000, and 100 units.

Some brokers show quantity in “lots”, while other brokers show the actual currency units.

As you may already know, the change in a currency value relative to another is measured in “pips,” which is a very, very small percentage of a unit of currency’s value.

To take advantage of this minute change in value, you need to trade large amounts of a particular currency in order to see any significant profit or loss.

Let’s assume we will be using a 100,000 unit (standard) lot size. We will now recalculate some examples to see how it affects the pip value.

·USD/JPY at an exchange rate of 119.80: (0.01 / 119.80) x 100,000 = $8.34 per pip

·USD/CHF at an exchange rate of 1.4555: (0.0001 / 1.4555) x 100,000 = $6.87 per pip

In cases where the U.S. dollar is not quoted first, the formula is slightly different.

·EUR/USD at an exchange rate of 1.1930:  0.0001 X 100,000 = $10 per pip

·GBP/USD at an exchange rate of 1.8040: 0.0001 x 100,000 = $10 per pip.

3.Margin Call and Stop Out

A Margin Call is when your broker notifies you that your Margin Level has fallen below the required minimum level (the “Margin Call Level”). A Margin Call Level is a specific percentage (%) value. Some forex brokers have a Margin Call Level of 100%. 

Stop Out is a minimum allowed level of margin (20% and lower) at which the trading program will start to close client’s open positions in order to prevent further losses that lead to negative balance (below $0).

If you abide by the rules of risk management and don’t put your entire deposit in trading at once, you’ll be safe from Margin Call and Stop Out.