Let’s go over some forex basics you need to know.

PIPS: A pip is the standard amount to show changes in the exchange rate/value in currency pairs. If a currency pair price is quoted to four decimal places, it’s the last number in the quote, that fourth decimal place. For example, a change in AUD/USD from .9473 to .9474 is a change in price of one pip. Some forex brokers now quote prices to a fifth decimal place, the fifth decimal representing 1/10 of a pip, but even then people generally quote the price simply to the fourth decimal place—so even if the price for EUR/USD is given as 1.22515, the price would still be stated by most people as simply, “EUR/USD is currently trading at 1.2251.”

I’m going to explain below how to find the precise pip value; however, if you want to generally estimate the value, and if you’re trading account is denominated in U.S. Dollars, 1 pip = $10 per standard lot, $1 per mini lot, and $0.10 (ten cents) per micro lot. This holds true for most of the major currency pairs like EUR/USD, GBP/USD and AUD/USD, but there will be some variation, more so when you move to more minor or exotic pairs, like, for example, AUD/JPY.

Now, here are pip value calculations:

A pip, the value of it, equals the amount of your position times 1 pip of the second currency quoted—e.g., in EUR/USD it would be USD. Example: Position, 1 standard lot of EUR/USD, Pip Value = 100,000 x 0.0001 = $10 USD

If all that seems a bit confusing, here’s the absolute easiest way to calculate pip value—simply put on a trade and then calculate the value from looking at your profit/loss in the trade. Example: If you’re trading EUR/USD and current price is 5 pips better than the price you entered the trade at—a 5 pip profit—and the profit showing on the trade is $5.00 USD, then your pip value for that position would be $1.00 USD, so every 1 pip movement in price is going to increase or decrease the profit or loss of your position by $1.00 USD. That would be the case if you were trading one mini lot and USD is the currency your account is denominated or held in. And from there, you can then calculate other values, such as the pip value for trading 5 micro lots (half the amount of 1 mini lot) would be $0.50 USD per pip, and the pip value for trading 1 standard lot (ten times the amount of 1 mini lot) would be $10 USD per pip. Maybe you’re still asking yourself if you absolutely need to be able to do all these mathematical calculations. No, you don’t, since your broker will normally do it all for you. Brokers also tend to provide forex calculators.

LOTS: A standard lot for forex trading is 100,000 units.

Lot sizes are as follows:

Standard – 100,000 units

Mini – 10,000 units

Micro – 1,000 units

EQUITY: Your balance is the money in your account with no trades open, or with all previous trades closed out. Equity is the amount of money you’d have in your account if you closed every one of your open positions at the current price. Equity equals your balance plus any open profits or losses in open trades.

Equity = Balance + open P&L

MARGIN: Margin is the money you need to have in your account in order to open a new position. After you open the position, the “maintenance margin” is the initial margin required multiplied by the stop out level that’s specified by your broker. “Free margin” is the money you have left over after opening position(s). You can use this money to open other positions with; it is the money in your account that isn’t tied up in holding positions and thus is “free” to do other things with. The “used margin” is the total amount of money in your account currently being used to hold all your open trades, or positions.

Example: Your account balance is 2,000 USD. Leverage is 1/100. You want to open 1 standard lot of EUR/USD. The current EUR/USD rate is 1.3000.

Initial Margin = 100,000 Euro / 100 = 1,000 Euro (or 1% margin requirement) = 1,300 USD

Maintenance Margin = 1,300 USD x 10% = 130 USD

LEVERAGE: Leverage is what enables you to open and hold a position that has a value that is more than your balance or equity—it’s the ratio of the amount of capital used in a transaction to the required security deposit (the required margin to open/hold a position). It provides the ability to control large dollar amounts of an investment with a relatively small amount of capital. For example, if you wanted to trade one standard lot with a value of $100,000, you don’t have to put up $100,000 in margin money; you only have to put up a percentage of that amount, determined by whatever level of leverage your broker offers. If you had 100:1 leverage, you’d only need $1 in available margin money per $100 of the actual position value. So in this case, you’d only need $1000 to trade a position whose actual value is $100,000. This is part of the “magic” of forex trading, the fact that you can control a large amount of money with just a little bit of money. However, be careful when trading with leverage as it acts as a double edge sword, multiplying your profits but also multiplying your losses.

The amount of leverage available varies from broker to broker, the most used being 100:1, the lowest usually being 20:1 and the highest being 1000:1. Basically, with 500:1 leverage, one micro lot of EUR/USD will require approximately $2.00 (US) in margin, whereas trading with only 50:1 leverage, it would require $20.00 in margin. You can easily calculate from there the requirements if using 100, 200, 400 or 1000:1 leverage.

The minimum security (margin) for each lot will vary from broker to broker. In the example above, the broker required a 1% margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit on the position.

SWAP: If you hold a position overnight in the forex markets, what actually occurs is that your broker closes the position at the very end of trading day (the New York session close) and then immediately reopens it for you as the next trading day begins—although you are not charged any spread or transaction fees for that. This is called a “swap” or “rollover” because in effect you are “swapping” or “rolling over” a position you held on the first trading day to an identical position on the next trading day.

When this occurs, there is a small swap rate amount that is either credited to, or subtracted from, your account. If the swap rate if positive—that is, if you are buying a currency that has a higher interest rate than the currency you are selling—then you will be paid the daily swap rate. If the swap rate is negative—that is, if you are buying a currency with a lower interest rate than the currency you are selling—then the daily swap rate will be charged to, or deducted from your account. Additionally, brokers offer varied swap rates, both positive and negative. One broker might offer a positive daily swap rate on a given currency pair of $8.00 per standard lot, while a different broker may only pay out $6.00. There are variations in negative swap rates as well. And finally, some brokers offer “swap free” accounts, where they do not pay out or charge any swap rate/rollover fees at all. (However, if you’re trading a “swap free” account, be sure you are aware of all the conditions of the account—some brokers, while they may not charge negative swap rates, charge other fees associated with positions held overnight. This is just part of the basic common sense of being aware of all your broker’s fees of any kind.)

Brokers tend to differ when calculating their swap rates as they have different types of private contracts with their liquidity providers (mainly banks). Most of them guide themselves by overnight interbank rates when updating and calculating swaps. They typically add a 2-3% APR on top of the rates they receive, as an extra commission charge. To make things more complicated, brokers display their swap rates in different ways and values.

Here is an example of the swap calculation:

Contract Notional Value x (Base Currency Interest Rate – Quote Currency Interest Rate) / 365 days x Current Base Rate = Daily Rollover Interest Credit/Debit

For example:

You buy 1 standard lot of EUR/USD. The price at the rollover time (5pm EST) is 1.2600. The overnight interest rate for the Euro is 0.84526% and the USD is 0.35457%.

$100,000 x (0.84526% - 0.35457%) / 365 x 1.2600

$100,000 x 0.49069% / 459.9 = $1.066

Example on MT4:

EUR/AUD has a swap rate of 11 points when you buy (it will be given as 11 on MT4 platform) and you want to trade a volume of 100,000 (A standard lot = 100,000)

Swap charge: 100,000 x 0.00011 = 11 AUD

If your account is in USD (base currency is in USD) you will need to convert the AUD into USD:

11 x 0.91549 = 10.07 USD (0.91549 is the AUD/USD rate at the time of calculation).

It´s important to know what your broker’s swap rates are. If you do not see them clearly listed on your broker’s website, send an email to your broker’s support email address requesting the rates, and the broker will send them to you (they will—it’s required by law that they inform you of their swap rates and also that they inform you of any changes in their rates). However, we have found that the most accurate way to test broker swap rates is to test them on a demo account.

Bottom Line

Again, the important thing to remember is that you don’t really need to be able to do all of this math. Your broker will freely provide you with trading calculators (pip, margin, risk, etc.) and charts showing all the daily swap rates, both positive and negative, for all the currency pairs available for trading through your brokerage firm.

We welcome your comments or questions below, and we’re always happy to help forex traders in any way we can. Please register with our site so that you can keep up with new services as we add them, and check out our “Profits Every Day” trading strategy by clicking here.

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JACK MAVERICK

Jack Maverick has over 20 years of experience in futures and forex trading, first as a broker and then as an independent trader.  He enjoys sharing the trading wisdom and knowledge he has gained from his own trading experience and from other successful traders.

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