In the past, spot foreign exchange transactions at a specific amount were called lots. The standard size for a hand count is $100000. There is also a small, micro and nano hand size of 10000, 1000 and 100, respectively.
As you already know, money is measured in points, which is the smallest amount of momentum in that currency. To take advantage of these small wave momentum advantages, you need to trade a lot of certain currencies to see significant profits or losses.
Suppose we're going to use $100000 (standard) hands. Now, we'll recalculate some examples to see how it affects point values.
1. The exchange rate of USD / JPY is 119.80 (0.01 / 119.80) × 100000 = 8.34 yuan
2. The exchange rate of US dollar / Swiss franc is 1.4555 (0.0001 / 1.4555) × 100000 = 6.87 yuan
Whether the dollar is in the first place or not, the formula is slightly different.
1. The exchange rate of euro / US dollar is 1.1930 (0.0001 / 1.1930) × 100000 = 8.38x1.1930 = 9.99734, which is increased to every 10 points
2. The exchange rate of GBP / USD or 1.8040 (0.0001 / 1.8040) × 100000 = 5.54x1.8040 = increased to 109.99416 pips
Your broker may have a different way of calculating the value of a point for many formulas of different sizes, but in any case, they will be able to tell you the currency point value you are trading at a particular time. As the market fluctuates, the value of the point will determine which currency you trade in.
What is leverage ratio?
You may wonder how a small investor like you can trade such a large amount of money. Think of the bank as your broker, which lends you 100000 yuan to buy a money broker. What the bank wants you to give it is a $1000 credit guarantee, which will belong to you, but not always. Sounds incredible? This is the result of leveraged foreign exchange trading.
How much leverage you use will depend on your broker and your personal habits.
Usually, brokers will require a certain amount of trading margin, also known as "margin account" or "initial margin." Once you deposit your money, you can trade. The broker may also specify how much money they need per unit (hand) to trade.
For example, if the permitted leverage ratio is 100:1 (or 1% hands requirement), and you want to trade hands worth $100000, but you only have $5000 in your account. Your broker will have no qualms about setting aside $1000 as a down payment, or "margin," and then letting you "borrow" the rest. Of course, any loss or gain will be deducted or added to the remaining cash in your account.
Each broker has a different minimum margin for each hand. In the example above, the broker asked for a 1% margin. This means that for every $100000 transaction, the broker requires a deposit of $1000 in that transaction.
How do I calculate my profit and loss?
So now that you know how to calculate point value and financial leverage, let's see how to calculate your profit or loss.
Let's take the example of buying US dollars and selling Swiss francs.
Your quotation is 1.4525/1.4530. Because you are buying U.S. dollars, you need to calculate it at a price of 1.4530, or at the selling interest rate that the trader has scheduled.
2. So you buy one hand (100000 units) at 1.4530.
A few hours after the trade price rises to 453.
4. The new quotation is USD / CHF 1.4550/1.4555. You bought money to trade, now you have to close your trade. You sell now and close the deal, so you have to take the "bid" price of 1.4550 to trade. This is the price that the trader wants to buy.
The difference between them is 450.00250.451.
6. In the formula we used, we now have (. 0001 / 1.4550) × 100000 = 6.87 yuan per point × 20 pips = 137.40 US dollars
7. Remember that when you open or close a trade, you have to follow the quote that floats at the time of buy / sell. You buy a currency with a bid or ask price, and when you want to sell it, you use the bid price.