Before you actually trade FOREX, it is very important that you understand all the terms used in FOREX Market.

Now, the most important thing you need to know would be how to calculate your Profit/Loss, right? For this, you have to understand PIPS and LOTS

Here we go....

PIP VALUE

Pip is the minimum fluctuation or smallest increment of price movement.

Lets say an exchange rate of EUR/USD moved from 1.2250 to 1.2251, now that's an increment of 1 Pip. And 1 PIP in this exchange is 0.0001

To get the Pip value, you have to divide 1 pip by its exchange rate.

For example, USD/CAD 1.4890 [0.0001 / 1.4890 = 0.00006715]

Now that you have understood PIP VALUE, lets skip to LOTS.

LOTS

You cannot simply buy currency in any value you like. For instance, USD/CAD 1.4890, when you want to buy USD you cannot simply buy 1USD or 10USD or 15USD as you wish.

Instead the buying and selling are done in lots. Standard lot size is USD100,000.00 So, when you buy, you have to buy either one lot or two lots, or a hundred lots. One lots means you are buying $100,000, buying two lots would mean buying $200,000, so on and so forth. Some brokers do provide smaller lot size like $10,000.

There you go, PIPS and LOTS all understood, yes?

Now what?

Calculate the PROFIT!

HOW TO CALCULATE PROFIT

Let's use USD / CAD example.

Assume the quote is 1.0822 / 1.0827

Lets buy USD and Sell CAD

Now, since you are buying USD, you will be using 1.0827.

A few hours later, the exchange rate increases. The new quote is, 1.0847 / 1.0852

As you have to sell USD now, you will be using 1.0847

---->The difference between 1.0827 and 1.0847 is 0.20 or 20 pips.

THE PIP VALUE

(0.0001 / 1.0847) X 100,000 = USD9.22 per pip

TOTAL PROFIT

9.22 X 20pips = USD184.40

That's a nice profit, yes? Considering you've waited for few hours only.

Don't you love FOREX?