Gold (XAU/USD): how it differs from currencies

The word 'contract size' means the amount of the underlying asset that one lot represents. For a currency pair, one standard lot is 100,000 units of the base currency. For gold, one standard lot is 100 troy ounces. That difference matters because the pip value is built from the contract size. A pip on gold is a move of 0.01 in the price. If one lot is 100 ounces, then one pip is worth 100 times 0.01, which is 1.00 US dollar per lot. On a currency pair like AUD/USD, one pip on a standard lot is 10 US dollars, not 1.00. So the same number of pips can mean a very different amount of money.

The platform shows the pip size in the number of decimal places. Gold is often quoted with two decimal places, such as 2350.25. A move from 2350.25 to 2350.26 is one pip. But some brokers quote gold with three decimal places, so 2350.254. In that case, the third decimal is a tenth of a pip, and the pip itself is still the second decimal. You must check the quote format on your own platform. The contract size may also be different: some brokers use 10 ounces per lot instead of 100. That changes the pip value by a factor of ten.

To find the pip value in US dollars, multiply the contract size by the pip size. For 100 ounces and a pip size of 0.01, that is 100 times 0.01, which equals 1.00 US dollar per pip. For 10 ounces, it is 10 times 0.01, which equals 0.10 US dollars per pip. The result is in the quote currency, which for XAU/USD is US dollars. If your account is in A$, you then convert that figure using the AUD/USD rate. The arithmetic is the same as for a currency pair, but the numbers you start with are different.

The daily range is the distance between the highest and lowest price in one trading day. Gold often moves further in a day than a major currency pair like AUD/USD. That is not a rule, but it is common. A wider range means a stop placed at the same distance in pips is more likely to be hit by normal price movement. If you use a 20 pip stop on gold because it works on AUD/USD, you may find that gold covers 20 pips in a few minutes without any news. The stop is then triggered before your idea has time to work.

To adjust for a wider range, you can either widen the stop or reduce the position size. Widening the stop increases the risk in dollars unless you also reduce the size. Reducing the size keeps the risk the same but makes the position smaller. There is no single correct choice. The point is that the stop distance and the position size are linked. You cannot carry both over from a currency pair without checking. A stop that is too tight for gold will produce many small losses. A stop that is too wide will produce a few large losses. Both change the risk per trade.

The daily range also affects the value of a pip in A$ over the course of a day. If gold moves 100 pips and you hold 0.10 lots, the profit or loss is 100 times 0.10, which is 10.00 US dollars. Converted at 0.6640, that is 10.00 divided by 0.6640, which equals A$15.06. The same 100 pip move on 0.10 lots of AUD/USD would be 100 times 1.00, which is 100.00 US dollars, or A$150.60. The gold position is smaller in dollar terms because the contract size is smaller. But the range in pips is often larger, so the two effects partly offset. You must calculate both.

The conversion from US dollars to A$ uses the AUD/USD rate. That rate is written as the number of US dollars per one Australian dollar. At 0.6640, one A$ buys 0.6640 US dollars. To convert a US dollar amount to A$, you divide by 0.6640. For example, 5.00 US dollars divided by 0.6640 equals A$7.53, rounded to the nearest cent. If the rate moves to 0.6700, the same 5.00 US dollars becomes A$7.46. The A$ amount changes even when the US dollar risk does not. That is a second source of variation.

Brokers may apply a conversion charge when your account currency is not the quote currency. The charge varies between brokers. Some include it in the spread, some add a small percentage, and some do not charge at all. You should check your broker's terms. The figures in this lesson do not include any such charge. They are worked from the contract sizes and the AUD/USD rate given. They will change when that rate changes. They will also change if the broker uses a different contract size or a different number of decimal places.

The arithmetic of risk per trade is therefore a chain: contract size times pip size gives the pip value in US dollars. Pip value times the number of pips in the stop gives the risk in US dollars. Risk in US dollars divided by the AUD/USD rate gives the risk in A$. Each link uses a number that can differ from a currency pair. If you skip a link, the final figure is wrong. The common mistake is to skip the first link and assume the pip value is the same as for a currency pair. The fix is to write the chain down and fill in each number before you place the order.