Hello, Serendipityz
Sorry for the long delay in replying to your post. I’ve been away from the forum.
You asked about the term “unit-to-pip value ratio”. I have seen that term in only one place — in the Babypips School lesson on position sizing. Here’s the first of two quotes from that lesson:
“Lastly, we multiply the value per pip by a known [B]unit/pip value ratio[/B] of EUR/USD.
In this case, with 10k units (or one mini lot), each pip move is worth USD 1.”
Further down in this same lesson, you will come to the second quote:
“Finally, multiply the value per pip move by the known [B]unit-to-pip value ratio:[/B]
(USD 0.375 per pip) * [(10k units of EUR/USD)/(USD1 per pip)] = 3,750 units of EUR/USD”
Here’s the page where those quotes can be found — Calculating Position Sizes | Position Sizing | Learn Forex Trading
I think this particular terminology is very confusing. And, to make matters even worse, the School uses two, slightly different, versions of this confusing terminology ([B]“unit/pip value ratio”[/B] in one place, and [B]“unit-to-pip value ratio”[/B] in another place).
If you have studied the lesson on position sizing, you have learned that doing the position-size calculations by hand is fairly simple when the cross-currency of the pair you are trading is the same as your account currency (for example, if you trade the EUR/USD in a USD-denominated account). But, the calculations are more complicated when the cross-currency is not the same as your account currency (for example, if you trade the USD/JPY in a USD-denominated account). The School lesson covers both of these cases, and the two quotes (above) are from the two examples given in the lesson.
Let’s summarize the simpler case (when the cross-currency matches the account currency), and let’s find a way to sidestep that confusing terminology.
If you’re doing a position-size calculation by hand (rather than using a Position Size Calculator), then you have to do these steps:
(1) Determine what portion of your account you are willing to risk — for instance 2% of your account balance.
(2) Determine the appropriate number of pips between your entry price and your stop-loss.
(3) Equate (1) and (2) above, in order to determine how much a pip will be worth in dollars, or pounds, or whatever your account currency is.
(4) Figure out what position size will make each pip worth the amount that you determined in (3) above.
The confusing terminology — “unit/pip value ratio” in one place, and “unit-to-pip value ratio” in another place — refers to step (4) above, and it basically means that, if you know the value of 1 pip per LOT, then you can figure how many lots (or what fraction of a lot) you should trade, in order to make 1 pip worth the amount you determined in step (3) above.
In this simple case which we are considering (cross-currency matches account currency), we know that a position-size of one standard lot (100,000 units of base currency) corresponds to a pip-value of $10 per pip. Furthermore, for other position sizes, we know that the pip-value is always proportional to the position size.
[B]This is the “ratio” that the School lesson is trying to denote with their awkward terminology.[/B]
Let’s run through a quick example:
You have a GBP-denominated account, and you want to trade the EUR/GBP. You observe that the cross-currency matches the account currency, so you know that for a 1-LOT position size, 1 pip will be worth £10; for a 1-mini-lot position size, 1 pip will be worth £1; etc.
You decide to risk no more than £8 on your EUR/GBP trade. And you determine that a 40-pip stop-loss is required on this trade.
To determine the correct position size for your EUR/GBP trade, such that a 40-pip move against you, tripping your stop-loss, will result in a loss of £8, you do the following calculations:
40 pips = £8.
Therefore, 1 pip = £0.20
1 pip would be worth £1 for a position size of 1 mini-lot (10,000 units of base currency)
Therefore, 1 pip would be worth £0.20 for a position size of 0.2 mini-lot (2,000 units of base currency).
So, the correct position size in this example is 2,000 units, or 2 micro-lots.
The awkward terminology in the School lesson refers to the last step in the example above. Specifically, the ratio referred to in the School lesson is any of the following equivalent metrics:
£10 per pip per STANDARD LOT (100,000 units of currency)
£1 per pip per MINI-LOT (10,000 units of currency)
£0.10 per pip per MICRO-LOT (1,000 units of currency)
£0.01 per pip per NANO-LOT (100 units of currency)
£0.0001 per pip per UNIT of currency
Note: in the example above, if the account currency were USD (instead of GBP), and if the pair traded had the USD as its cross-currency (instead of the GBP), all of the numbers would remain the same. That is, each of the £-signs in the example can be replaced with a $-sign, and the example will still be valid.
Another note: in the forex business, the terms “micro” and “nano” are mis-used. In science and mathematics, micro means one-millionth, and nano means one-billionth. So, this particular forex terminology is off by several orders of magnitude.