I get there are three lot sizes: standard, mini and micro. How is one converted into another, the value of each and how are they indicated in the “Volume” field in MT4?
Once that’s explained, how is margin equated with lot size to determine pip value? :eek:
Please make it simple.
Thanks,
V
There are actually four “lot-sizes”, if you include nano-lots. But, nano-lots are not nearly as common as the three you referred to. So, let’s stick to the three that you asked about.
1 standard lot = 100,000 units of base currency = 10 mini-lots = 100 micro-lots
1 mini-lot = 10,000 units of base currency = 10 micro-lots
1 micro-lot = 1,000 units of base currency
The MT4 platform allows you to use position sizes which are multiples of micro-lots, multiples of mini-lots, or multiples of standard lots. And the MT4 platform shows all of these various position sizes as multiples or fractions of standard lots.
Examples: You want to place a trade with the following position size —
1 standard lot — the MT4 platform will show your “volume” as 1.
3 standard lots — volume will be 3.
1 mini-lot — volume will be 0.1 (because 1 mini-lot is one-tenth of a standard lot)
5 mini-lots — volume will be 0.5 (which is 5 times 0.1)
1 micro-lot — volume will be 0.01 (because 1 micro-lot is one-hundredth of a standard lot)
7 micro-lots — volume will be 0.07 (which is 7 times 0.01)
What you cannot do is trade a fraction of a micro-lot (say, one-half of one micro-lot). The minimum position size is 1 micro-lot.
Margin and pip-value are two separate calculations.
• Margin is determined by (1) the pair you trade, (2) your position size, (3) your account currency, and (4) your broker’s maximum allowable leverage.
Example: you place a trade (either long or short) in the GBP/JPY pair; your position size is 1 mini-lot; your account currency is USD; and your max. allowable leverage is 50:1.
Your position size (1 mini-lot) equates to 10,000 units of GBP, because GBP is the base currency in the pair you are trading. Let’s say that, at the time you placed your trade, GBP/USD = 1.6060. That means that £1 = $1.6060. Therefore, the dollar-value of your position is $16,060. Your broker will require margin on this trade of 2% of the dollar-value of your trade (because your broker leverage is 50:1, and 1 ÷ 50 = 0.02).
Therefore, margin on this trade will be $321.20 (which is 2% of $16,060.)
• Pip-value is determined by (1) the pair you trade, (2) your position size, and (3) your account currency. Notice that your broker’s maximum allowable leverage, and the margin required on this trade, do not figure into the calculation of pip-value.
You can calculate pip-values by hand, if you love to spend your time with trivial tasks. But, it’s much easier to let your trading platform do it for you. Or, if you want a “second opinion”, use a pip-value calculator, such as this one on the Babypips site — Pip Calculator: Free Online Forex Pips Calculation Tool for Traders
Applying that calculator to the GBP/JPY trade in the example above, you would enter the following inputs (based on prices current at the time of this post): pair GBP/JPY, position size 10000, ask price (for the GBP/JPY) 140.82, value in USD, and price for the USD/JPY 87.62
Then, you would hit “calculate”, and the calculator would tell you that a 1-pip price move is worth $1.1413 in this GBP/JPY trade.
Even after all that, the “exact” pip-value given by the pip-value calculator may not agree with your broker’s pip-value; but, it should be close. Your broker probably rounds the exact figure up or down, as the case may be. In this case, your broker would probably quote the pip-value as $1.14
All of these calculations are a bit complicated. And they’re definitely tedious. So, you didn’t exactly get the “simple” answers you were asking for. In this case, you could have a simple answer, or you could have the correct answer.