Spot currency trading is conducted through Pips, the Percentage Interest Point and found in the 4th decimal place in any currency pair arrangement, 2nd decimal place for the Japanese Yen arranged as USD/JPY and Yen cross pairs such as EUR/JPY, GBP.JPY. To offer an example, the current USD/JPY price is 97.15, GBP/JPY 156.03 and EUR/JPY 132.01.
The value of a Pip depends on the lot size traded. A standard lot equates to control of 100,000 currencies and is 1 / 100 of a point ( 0.01%) , one full basis point ( 0.001 decimals) or $10 per pip traded. A 1% movement in any currency pair equates to 100 Basis Points. To calculate the GBP/USD that trades as GBP vs the US,
0.001 X 100,000 = $10 per pip. One Standard lot equates to $10 per pip, two lots $20, three lots $30. No dollar limit exists to the amount of lots to buy or sell.
A Mini lot in the GBP/USD currency pair equates to 0.0001 X 10,000 = $1.00 per pip. Mini lots allow a trader to control 10,000 currencies in each lot. A Mini lot is 10,000 currencies at $1.00 per pip, two lots equates to $2.00 per pip, three lots $3.00. No dollar limit exists to the amounts of lots to buy or sell. The advantage to trade Mini lots is one can buy or sell 15 lots or 1 1/2 Standard lots. One Standard lot equates to 10 Mini lots. The design of the Mini lot could be a nice tool for the beginners to test drive the forex market with limited risk.
Micro lots equates to 0.10. Each lot equates to 1 cent per pip. Quotes in examples are in US Dollars because the Base currency is in US Dollars. Suppose we quote USD/CHF, US dollars vs Swiss Francs. How much does each pip earn? We simply divide by the exchange rate.
For example, USD/CHF exchange rate is 1.0570 and equates to $10.00 divided by 1.0570 = $9.46 per pip based on 1 Standard lot, 0.9460 as 1 pip per Mini lot. The price of a lot is different from market to market and it depends on which market to trade, how much liquidity is available, how much Bids and Offers cost and the amount of narrowing or widening of the spreads.
Bid / Offer
Currency trading in days of old, traders once paid a per lot price, normally $50 per lot. With recent rule changes instituted by the National Futures Association in the United States, traders now pay a per lot price based on the spread between Bid / Offer, also known as Bid/Ask, Buy/Sell, Borrow / Lend, Deposit / Lend.
The Bid price appears on the left side of a currency pair and that is the quote to sell while Ask /Offer appears on the right side of a currency pair and represents the price to buy a currency pair. The price of a spread between Bid / Offer depends on liquidity in the market and the particular currency pair. Fast moving markets and high volatility will see small spreads generally, non-liquid markets and non-liquid currency pairs will see higher spreads. Currency pairs with wide ranging movements such as USD/ZAR ( South African Rand) will see a spread cost between 70 to 300 pips per lot. Trading the major pairs against the US dollar generally cost between 2- 10 pips per lot.
The determination to gauge direction of bid /offer prices is to determine if a price point is supported in which case the bid and/ or offer will be supported. Since spreads are so minuscule in relation to days of old when a per lot price was the order of the day, focus is no longer mentioned or studied in the context of Bid / offer prices.
Margin in the United States allowed for a 100 to 1 leverage and a 1% margin. One Standard lot to control 100,000 currencies must maintain the 1% margin or the position would be sold by the broker if the 1% threshold was lost. The account would need either more money to maintain the position or the trader would suffer the loss. With recent 2010 rule changes instituted by the National Futures Association , Margin in the United States is now 50:1 with a 2% leverage, 20 to 1 with a 5% Margin for exotic currency pairs such as the South African Rand ( ZAR), Turkish Lira ( USD/ TRY ).
Initially, these basic currency trading terms may seem to be complicated to the beginners; however, one can get used to them very easily by opening a practice trading account offered by brokers these days.
p.s. Those who missed the Exchange Rates: A Tutorial part 1, read here: http://fiblogix.com/exchange-rates-a-tutorial-part-1/
'Inside The Currency Market'