Beginning
Forex - How Are Lots Traded & What The Heck is a PIP?
by Amber Lowery
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If you are new to Forex, no doubt you are confused
by all of the strange and unfamiliar terminology. For example, what
is a pip? Also, you are probably already aware that Forex trading
can be risky. How can you limit your loss and best protect your
funds? This article briefly covers how currency lots are traded
to help you better understand how to plan your trading strategy
and manage your funds.
In Foreign Currency Exchange (FOREX), earnings
are expressed in "pips". Pip is short for Price Interest
Point, also called points. Whereas the smallest denomination in
USD is the penny ($.01), in Currency Exchange, funds can be traded
in an even smaller denomination, $0.0001. This means that very small
movements in currency prices can create large profits.
So, a PIP is the smallest unit a currency can
be traded in. The actual value of a pip is not a set price. If you
are trading with a standard account, a pip is worth $10. If you
are trading a mini account, a pip is only worth $1.
The value of a pip changes based upon the size
of your account, because the size of your account affects how much
currency you can leverage. A standard full size trading account
is 100,000 units of the base currency. If you are trading in USD,
a standard account has a value of $100,000 USD.
A mini lot is 10,000 units of base currency.
If you are trading mini lots, you can leverage $10,000. This is
why a pip in a mini account is worth less than a pip in a standard
full sized account.
While Forex trading allows you to leverage more
funds than you actually have, this can be a double edged sword.
While you can make profits on funds that you leverage (rather than
own), you can also have losses amplified as well. There are several
ways, however, to manage your risk when trading Forex. If you are
interested in trading Forex, you should have a definite trading
strategy. You must educate yourself to know when to enter and exit
the market and what kind of movements to anticipate.
You can also place something known as a stop
loss order. Stop-loss orders the typical way traders minimize risk
when placing an entry order. A stop-loss order to exit your position
if the currency price reaches a certain point.
If you are taking a long position, you would
place the stop loss order below current market price. For a short
position, you would place a stop loss order above current market
price. This technique allows you to manage your risk and, just as
the name suggests, stop your losses at a certain point.
As you can see, Forex trading can be complex,
but once you understand the basic fundamental principals of how
lots are traded, its starts to come together for you. Foreign Currency
Trading can be quite profitable and and exciting way to invest.
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