Currency market fundamentals
Four calculations that separate trading from guessing. Every formula comes with its worked example and its calculator, so you can enter your own figures instead of taking ours on trust.
The fundamentals of trading the currency market come down to four calculations: the pip value (for pairs with USD in the quote, 10 USD per standard lot), the required margin (volume × contract size × quote ÷ leverage), the cost of the trade (spread × pip value + commission) and the swap for rolling the position over. Without mastering these four formulas, trading becomes guessing, because the trader knows neither their risk nor their costs.
1. What a quote is
The pair EUR/USD = 1.0850 means that for 1 euro (the base currency) you receive 1.0850 dollars (the quote currency). Buying the pair means buying the base currency and paying with the quote one. Selling is the reverse.
The broker publishes two prices: Bid, the price at which you sell, and Ask, the price at which you buy. The difference between them is the spread. Every purchase is executed at the Ask and every sale at the Bid, so the trade starts with a loss equal to the spread.
2. The pip and its value
The pip is the minimum standard change in price. For most pairs it corresponds to the fourth decimal place (0.0001); for yen pairs, to the second (0.01). The fifth digit of the quote 1.08503 is the pipette, one tenth of a pip.
For pairs where the quote currency is the dollar (EUR/USD, GBP/USD, AUD/USD) the calculation simplifies:
| Volume | Contract size | Pip value |
|---|---|---|
| 1.00 lot | 100,000 | 10 USD |
| 0.10 lots | 10,000 | 1 USD |
| 0.01 lots | 1,000 | 0.10 USD |
For USD/MXN the calculation is different
The USD/MXN pip equals 0.0001 pesos. With the quote at 18.5000, the pip value for 1 lot is:
An important practical conclusion follows: 1 pip of USD/MXN is worth roughly 18 times less than 1 pip of EUR/USD. A daily USD/MXN move of 1,400 pips is worth, in money, around 756 USD per lot, whereas a EUR/USD move of 80 pips is worth 800 USD. Comparing the volatility of pairs in pips is meaningless; it has to be compared in the account currency.
Open the pip value calculator below and switch from EUR/USD to USD/MXN without touching the volume. The effect is immediate: the same number of pips means completely different amounts of money.
3. Leverage and margin
Leverage is the ratio between the size of the position and the amount that stays tied up in the account. Leverage of 1:500 means that a position of 100,000 USD requires 200 USD of margin.
The margin level = (equity ÷ used margin) × 100%. Equity is the balance plus the unrealised floating result of open positions.
How a real situation develops
A deposit of 1,000 USD and a position with 108.50 USD of margin. The margin level is 921%. The position goes into a loss of 700 USD → equity falls to 300 USD → the margin level drops to 276%. Another 200 USD of loss → equity of 100 USD → level of 92% → the Margin Call is triggered (100% threshold). If the level reaches 30%, Stop Out is triggered and the platform closes the positions forcibly.
Leverage does not increase risk by itself. Risk is determined by the size of the position and the distance to the stop loss. Leverage of 1:500 with a position of 0.01 lots is safer than 1:30 with 5 lots. Leverage affects how much money stays tied up as security, not how much is lost when the price moves against you. What high leverage does do is allow a disproportionate position to be opened by mistake.
4. Total cost of a trade
+ commission × volume
+ swap × number of nights
The position has to travel 3.1 pips in your favour just to break even. In intraday trading the swap is not accrued and the break-even point falls to 1.0 pips. That is exactly why holding positions open for weeks completely changes the arithmetic of a strategy.
5. Swap
The swap is positive when you buy the currency with the high interest rate and pay with the low-rate one. Example: Banxico rate 10.25%, Fed rate 4.50%. Selling USD/MXN — that is, buying pesos — generates a positive swap; buying USD/MXN generates a negative one.
Wednesday's triple swap
Currency transactions settle on the T+2 schedule. A position opened on Wednesday settles on Friday, so rolling it over Wednesday night means crossing the weekend. That is why on the night from Wednesday to Thursday three days' swap is accrued.
The strategy of holding a position for the positive swap works for years and is wiped out in days. A rate differential of 5.75% a year equals around 0.016% a day. A USD/MXN move of 3% in a single session cancels roughly half a year of swap. The swap is a pleasant extra, never a reason to open a position.
6. Sessions and time zones
| Session | Mexico | Bogotá / Lima | Santiago | São Paulo | Character |
|---|---|---|---|---|---|
| Asian | 18:00–03:00 | 19:00–04:00 | 20:00–05:00 | 21:00–06:00 | Narrow ranges; JPY and AUD |
| European | 02:00–11:00 | 03:00–12:00 | 04:00–13:00 | 05:00–14:00 | Maximum volume; EUR and GBP |
| American | 07:00–16:00 | 08:00–17:00 | 09:00–18:00 | 10:00–19:00 | US data; USD and LatAm currencies |
| EU+US overlap | 07:00–11:00 | 08:00–12:00 | 09:00–13:00 | 10:00–14:00 | Peak liquidity and volatility |
For Latin American currencies, trade in the American session, when the local banks are open. For EUR/USD and GBP/USD, the best moment is the overlap of the European and American sessions. Trading overnight in local time means a narrow range and a wide spread at the same time: the worst possible combination.
7. Correlation
Pairs are not independent. EUR/USD and GBP/USD have historically maintained a positive correlation of around +0.85. Opening buys in both pairs at the same volume is not diversification: it is a doubled bet against the dollar.
Rule: add up the risk of correlated positions. Three long positions in EUR/USD, GBP/USD and AUD/USD with 1% risk each amount, in practice, to a risk close to 3% on a single idea: “the dollar will weaken”.
One relationship matters especially for the region: USD/CLP correlates negatively with the copper price and USD/COP with Brent. Buying USD/COP and selling oil is, in essence, the same bet executed twice.
8. Checklist before your first trade
- I know the pip value of this instrument in my account currency.
- I have set the stop loss level before entering, from the structure of the chart and not from the amount I am prepared to lose.
- I calculated the volume with the risk formula; I did not pick it “by eye”.
- The risk on the trade does not exceed 1% of the deposit.
- The potential profit is at least twice the risk.
- I have checked the economic calendar: there are no high-importance events on the pair's currencies in the next 2 hours.
- The spread is currently within the normal range for this instrument.
- The position does not correlate with those I already have open.
- I have written the reason for the entry in the journal before opening the position.
Calculators for this lesson
Pip value, position size, margin and Stop Out, and swap. Enter your real deposit and your instrument: the conclusions change a great deal depending on the pair.
Test: currency market fundamentals
10 questions with an explanation of each answer. The score needed to move on to level 2 is 8 out of 10. They check: calculating the pip value in pairs with the dollar in the numerator and in the denominator, the margin formula, the relationship between leverage and risk, the mechanics of the triple swap, the difference between Margin Call and Stop Out, liquidity hours and the hidden accumulation of risk in correlated pairs.
Frequently asked questions
Pip value = (pip size ÷ current quote) × contract size. For pairs with the dollar in the quote (EUR/USD, GBP/USD) the pip is worth 10 USD per standard lot, 1 USD per mini lot and 0.10 USD per micro lot. For USD/MXN with the quote at 18.50, the pip per standard lot is worth around 0.54 USD.
Leverage on its own does not increase risk. Risk is determined by the size of the position and the distance to the stop loss. Leverage only affects the amount of funds tied up as security. A position of 0.01 lots at 1:500 leverage carries less risk than one of 5 lots at 1:30.
Currency transactions settle on the T+2 schedule, that is two business days later. A position rolled over Wednesday night settles on Friday and therefore spans the weekend. That is why on the night from Wednesday to Thursday the swap for three days is accrued.
For dollar pairs and for the Mexican peso the optimum window is 07:00 to 16:00 Mexico City time, which corresponds to the American session. Peak liquidity occurs between 07:00 and 11:00, when the European and American sessions overlap. Overnight, spreads widen and moves become erratic.
A Margin Call is the warning that the margin level has fallen to a critical value. Margin level = (equity ÷ used margin) × 100%. At Sening Capital the Margin Call is triggered at 100% on the Essential and Active plans and between 90% and 60% on the higher plans. On reaching the Stop Out level — 40% on Essential to 15% on Institutional — losing positions are closed automatically.
Because the broker publishes two prices: Bid, at which you sell, and Ask, at which you buy. A purchase is executed at the Ask price and valued at the Bid price, so the position starts with a loss equal to the spread. It is the cost of entering the market, not an additional broker fee.
Apply these formulas before you trade
Sening Capital builds the position size calculator into the order window: you give the risk and the stop, and the volume is worked out for you.
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