When trading forex on MT4 it’s incredibly important to understand our trade size so we can ensure we’re not overexposing ourselves relative to the size of our trading account.
When trading Forex on MT4 1 lot = 100,000 of the base currency so say we’re trading 1 lot of EUR/USD this means we’re trading €100,000 worth of USD.
In order to calculate our Pip Value we must use the following formula;
Trade Size x Pip Location = 100,000 x 0.0001 = €10 per pip. This means for every increment of 0.0001 in the price of EUR/USD we gain or lose €10 depending on whether we’re long or short.
Let’s look at a worked example to help us fully grasp this point. I have deposited €100,000 of my own money into a trading account. The first trade I look to take is long (buy) 1 lot of EUR/USD @ 1.1168 and I decide to set my stop loss at 1.0968 which is .0200 or 200 pips below the current price. This means if the trade moves against me and the price drops to 1.0968 I stand to lose 200 pips x €10 per pip = €2,000 which represents 2% of my trading account (€2,000/€100,000)
If the price of EUR/USD were to rise to 1.1350 and I decide to close out of the position there would be a gain of 0.0182 or 182 pips x €10 per pip realising a €1,820 profit.
This is a clear worked example of how trade sizes and stop losses relate to the risk you’re exposed to when trading forex markets.