Calculating Contract Size
Forex is commonly traded in specific amount called lots. 1 lot will represent 100,000 units.
For Metatrader the smallest contract size is 0.01.
In the above example, if I enter a long position 1 lot of Gbp/Usd, I would have entered a contract size of 1.25087*100,000 units*1 lot = 125,087 USD.
If I entered 0.01 lot of Gbp/Usd, I would have entered a contract size of
1.25087*100,000 units *0.01 lot=1250.87 USD.
The change in a currency value relative to another is measured in pips. Let me give you a few more examples. It is important to know this so you are able to measure your risk and reward and put your stop loss positions accurately.
USD/JPY at an exchange rate of 107.559: (.01 / 107.559) x 100,000 = $9.29 per pip if someone buy 1 lot of USD/JPY
EUR/USD at an exchange rate of 1.08752: (.0001 / 1.08752) X 100,000 = $10.87 per pip if someone buy 1 lot of EUR/USD
It is important to take note that for JPY, the second decimal place is 1 pip while for other currency pairs such as the USD, the fourth decimal place is 1 pip. So take for the above example, EUR/USD at an exchange rate of 1.08752, when Euro/Usd moves from 1.08752 to 1.08762 it will be 1 pip. So if someone enters a contract size of 1 lot of Eur/Usd at 1.08752 and the price move from 1.08752 to 1.08952 this person would have made total of 20 pips which is equals to 200 USD. And if someone enters a contract size of 0.01 lot, the person would have made a profit if 2 USD.
Bid/Ask and Spread
In the above picture, Eur/Usd has a bid price of 1.0873 and and an ask price of 1.08752. This means that you can sell Euro/Usd for 1.0873 and you can buy Eur/Usd for 1.08752 and the difference 1.08752-1.0873= 0.00222 is known as the spread which in this example will be 2.2 pip. That means if you have bought Eur/Usd with a contract size of 0.01 lot at 1.08752 and sold it immediately at 1.0873, you would have lost 2.2 pips which is equals to $0.22 USD.
However, for other products such as crude oil, the contract size is priced in barrels.
1 lot of crude oil=1000 barrels. In the above example, if I enter a long position 1 lot of crude oil, I will be entering a position size of 18.23*1000 barrels*1 lot= $18230 USD. If I enter 0.01 lot of crude oil, I will be entering a position sizing of 18.23*1000 barrels*0.01 lot= $182.30 USD.