Understanding Pips and Ticks

A Pip (Point in Price) is the smallest price change a given exchange rate can make. For other instruments, such as indices and shares, the minimum price movement is called a Tick.

Pip Calculation in Currency Pairs

  • Standard Quoting (Four Decimal Points): For most currency pairs, the pip is usually the fourth decimal point.
    • Example: EUR/USD price moves from 1.1358 to 1.1359. The difference is 0.0001, or 1 pip.
  • Five-Decimal Platforms (Pippettes): Some platforms quote prices in five decimal points.
    • Example: If the price moves from 1.13575 to 1.13590, the difference is 0.00015, or 1.5 pips.
  • Japanese Yen Pairs (Exception): All Japanese Yen pairs are quoted in two or sometimes three decimal points.
    • Example: EUR/JPY is quoted 110.45 or sometimes 110.454.

Bid, Ask, and Spread

Instruments are always quoted using two prices:

  • Bid Price: The price at which you can sell the instrument (always lower).
  • Ask Price: The price at which you can buy the instrument.

The difference between the bid and the ask price is called the Spread, which represents the cost of the transaction. The spread varies significantly across different instruments (e.g., 1 pip on EUR/USD, $0.4 on Gold, $55 on Bitcoin).

Trading Lots and Volume

On MT4 and MT5 trading platforms, instruments are always traded in specific amounts called lots.

Forex Lot Sizes

In forex, the lot size is based on units of the base currency:

  • One Standard Lot: 100,000 units of the base currency.
  • One Micro Lot: 1,000 units of the base currency.

Examples:

  • EUR/USD: Standard lot is €100,000. Micro lot is €1,000.
  • GBP/USD: Standard lot is £100,000. Micro lot is £1,000.
  • USD/JPY: Standard lot is $100,000. Micro lot is $1,000.

Commodities and Stock Lot Sizes

For commodities, stocks, and other instruments, a lot represents the number of units of that instrument.

  • Gold: One standard lot is 100 ounces; one micro lot is 1 ounce.
  • Bitcoin: One lot is 1 coin.
  • US 500 Index: One lot is 1 unit of the index.
  • Facebook (Shares/CFDs): One lot is 10 shares.

Calculating Profit and Loss (P&L)

1. Forex P&L

Profit or loss is calculated by multiplying the amount traded (lot size) by the pips gained or lost.

Case A: Quote Currency is USD (e.g., EUR/USD)

  1. Buy 1 standard lot of EUR/USD at 1.1358.
  2. Sell at 1.1373. (Gain: 15 pips or 0.0015).
  3. Calculation: 0.0015 (pips) x 100,000 (lot size) = $150 Profit.

Case B: USD is the Base Currency (e.g., USD/JPY)

  1. Buy 1 standard lot of USD/JPY at 110.50.
  2. Sell at 110.90. (Gain: 40 pips or 0.40).
  3. Profit in Quote Currency (JPY): 0.40 x 100,000 = 40,000 JPY.
  4. Conversion to USD: 40,000 JPY / 110.90 (closing rate) = $360.68 Profit.

2. Commodities P&L

P&L is calculated by multiplying the dollars gained/lost per unit by the lot size (total units traded).

  • Buy 1 standard lot (100 ounces) of Gold at $1,205.
  • Sell at $1,200 (Loss: $5 per ounce).
  • Calculation: $5 (loss per ounce) x 1 lot x 100 ounces/lot = $500 Loss.

3. Stock CFD P&L (Example: Facebook)

  • Buy 15 lots of Facebook CFDs (1 lot = 10 shares) at $177.
  • Sell at $178.10 (Gain: $1.10 per share).
  • Calculation: $1.10 (gain per share) x 15 lots x 10 shares/lot = $165 Profit.

4. Index P&L (Example: US 500)

P&L is calculated by multiplying the points gained/lost by the number of units traded.

  • Buy 100 lots of US 500 (1 lot = 1 unit) at 2,644.
  • Sell at 2,660 (Gain: 16 points).
  • Calculation: 16 points x 100 lots x 1 unit/lot = $1,600 Profit.

Types of Trading Orders

Market Orders

A market order is the most basic and common type of order. It executes the trade immediately at the best available price when the order is received.

  • Bid Price: Best available price to sell.
  • Ask Price: Best available price to buy.

Pending Orders

Pending orders are executed only when the price reaches a predetermined level. They are categorized into limit orders and stop orders.

Limit Orders

Used to get a better price than the current market price:

  • Buy Limit: Used to buy lower than the current market price.
  • Sell Limit: Used to sell higher than the current market price.

Stop Orders

Used to enter a position that confirms momentum, or to stop a loss:

  • Buy Stop: Used to buy higher than the current market price.
  • Sell Stop: Used to sell lower than the current market price.

Trailing Stop Order

A stop order set a predefined number of pips away from the current market price. Its purpose is to protect profits:

  • It automatically adjusts (trails) the stop loss as the market moves in your favor.
  • It maintains its level if the market moves against you.
  • If the market reverses by the predefined number of pips, a market order is triggered to close the position.

Detailed Summary

This text explains fundamental trading concepts including Pips (Point in Price) and Ticks (minimum movement for indices/shares), how price changes are calculated, and the structure of trading quotes (Bid, Ask, and Spread). It details the definition and size of Lots across different asset classes (forex, commodities, stocks), providing formulas and examples for calculating Profit and Loss (P&L) based on the instrument traded. Finally, the text outlines the different types of trading orders: Market Orders (immediate execution) and Pending Orders, which include Limit Orders (seeking a better price), Stop Orders (confirming momentum or stopping loss), and the dynamic Trailing Stop Order (protecting profits by automatically adjusting the stop level).

Key Takeaways

  • A Pip is the smallest price change for an exchange rate; a Tick is used for indices and shares.
  • For most currency pairs, 1 pip is the fourth decimal point (0.0001), but platforms using five decimals use Pippettes (0.00001).
  • Japanese Yen pairs are an exception, quoted typically using two decimal points.
  • The Spread is the difference between the Bid Price (price to sell) and the Ask Price (price to buy), representing the transaction cost.
  • Trading volume is standardized using Lots. A Standard Lot in forex is 100,000 units of the base currency, and a Micro Lot is 1,000 units.
  • P&L for forex is calculated by multiplying the amount traded (lot size) by the pips gained or lost, often requiring conversion if USD is the base currency.
  • P&L for commodities and stocks is based on the dollars gained/lost per unit multiplied by the total units traded.
  • Market Orders execute immediately at the best available price.
  • Pending Orders include Limit Orders (Buy Limit lower, Sell Limit higher) and Stop Orders (Buy Stop higher, Sell Stop lower).
  • A Trailing Stop Order automatically adjusts the stop loss level to protect profits when the market moves favorably, but remains fixed if the market moves against the position.