Hi,
Let me start with a link to the school lesson that has you feeling “ugh”.
In the USD/JPY example, 0.01 does not refer to 0.01 standard lot. It refers to one pip in a yen-pair.
Let’s review a couple of things, just to make sure they’re clear.
In yen-pairs, the second decimal place represents single pips, the first decimal place represents tens of pips, and so forth.
In the school lesson, USD/JPY = 119.80. In this price, the zero (in the second decimal place) represents 0 pips. The 8 (in the first decimal place) represents 80 pips. And so forth. So, if the price were to increase by 5 pips, it would become 119.85. And if that new price increased by an additional 62 pips, it would become 120.47. If you don’t follow that math, work with it, until you understand it.
Why all this review of pips and their location within forex prices?
Because we’re trying to calculate the USD-value of a pip for one unit of currency, and then use that value to get the USD-value of a pip for 100,000 units of currency. And the school lesson does all this in one calculation.
But, to make the calculation clear, let’s break it into two parts.
• First, we want to find the USD-value of a pip for one unit of currency.
Recall that in yen-pairs, the second decimal place represents one pip. That means that one pip in a JPY-price is 1/100 of one yen. But, we don’t want to know the value of that pip in JPY. We want to know it in USD. So, we divide the value of one pip (in JPY) by the exchange rate, to convert its value in JPY to its equivalent value in USD.
In algebraic form, it would look like this: ¥0.01 / (¥119.80 / $) = $0.0000834 That’s the value in USD of one pip, when we’re dealing with just one unit of currency.
• The second step is a snap.
The value in USD of one pip, when we’re dealing with 100,000 units of currency, will simply be 100,000 times the value calculated above – that is, $8.34
In the second example in the school lesson, the currency pair is USD/CHF.
In all currency pairs except yen-pairs, the fourth decimal place represents single pips; the third decimal place represents tens of pips; the second decimal place represents hundreds of pips; and so forth.
So, following steps similar to the USD/JPY example above, we can say that the value of one pip is 0.0001 Swiss franc. But, we want it’s value in USD. So, we divide 0.0001 by the USD/CHF exchange rate to get the USD-value of one pip in a single unit of currency. And then, we multiply by 100,000 to get the USD-value of one pip in one standard lot of currency. And, once again, the school lesson does all this in one calculation.
I hope now you’re feeling less “ugh” 