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Smart Money Concept, or SMC, is a technical trading strategy used by major traders such as financial institutions, banks, and various funds that play a significant role in the currency exchange market. These large traders have massive investment volumes, which influence market movements. This concept was developed to help predict the future direction of the market based on the trading activities of these major players.
How to calculate currency value in trading
In the international currency exchange market, when trading various currency pairs, how can we understand what EUR/USD means or how much XAU/USD is worth? Here, we will learn how to count or calculate the currency value in trading.
When reading currency values, you will see that currencies are paired with one another, with the rule that the currency or asset listed first in the pair is always valued at 1.
Examples:
XAU/USD = 2025.00
This means that 1 ounce of gold is worth 2025.00 USD.
EUR/USD = 1.07000
This means that 1 EUR is worth 1.0700 USD.
USD/JPY = 149.900
This means that 1 USD is worth 149.900 JPY.
How to measure price movement
The unit we use to measure price movement of currencies in the foreign exchange market is called a Pip, or Price Interest Point. In the past, most currency pairs had 4 decimal places, but nowadays, most brokers have started using 5 decimal places to increase the precision in calculations. This extra decimal place is called a Point, which is similar to a Pip but offers greater accuracy.
Example:
When the price of EUR/USD rises from 1.07000 to 1.07010,
it is considered a price change of 10 Points, meaning the value has increased by 10 Points.
When the price of GBP/USD moves from 1.25000 to 1.25050,
it is considered a price change of 50 Points, meaning the value has increased by 50 Points.
How to calculate profit and loss
When placing an order, we first need to understand what a Lot is. A Lot is the unit used to define or measure the contract size we want to trade. The size of 1 Lot varies depending on the type of asset.
For example:
1 Lot in major currencies equals 100,000 units.
“Opening a Buy order for 1 Lot of the EUR/USD pair means buying 100,000 euros.”
1 Lot of gold equals 100 ounces of gold.
“Opening a Buy order for 1 Lot of the XAU/USD pair means buying 100 ounces of gold.”
To calculate profit or loss, multiply the price movement by the contract size:
Price movement (Points) \* Contract size (Lots) = Profit/Loss
For example:
If we open a Buy order of 1 Lot and the price increases by 1 point, we make a profit of \$1.
1 point \* 1 lot = \$1
If we open a Sell order of 1 Lot and the price decreases by 100 points, we make a profit of \$100.
100 points \* 1 lot = \$100
This formula can also be used to calculate potential losses.
\*The smallest contract size for opening an order is 0.01 Standard Lots.
