How Are Lots and Pips used in Forex Trading

If you are new to Forex, no doubt you are confused by pips, lots, leverage, and all of the other strange and unfamiliar terminology used in discussing Forex. 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 pips and 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.

PIPS are the smallest units 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 pips changes based upon the size of your account. 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 pips in a mini account are worth less than pips 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. Leverage is the degree to which an investor or business utilizes borrowed money.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 new to 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. A stop-loss order is a market order type where the currency that you bought will be sold if it falls below a certain value thus keeping you from incurring more losses.Stop-loss orders are the typical way traders lessen risk when placing an entry order. When set up, a stop-loss order will remain effective until the long currency is sold or if you cancel it. The value of the stop-loss order is a forex novice’s best friend.

If you are taking a long position, you would place the stop loss order below current market price. This is typical for a long position (when you buy the base currency in anticipation that it’ll appreciate) where it will be automatically sold when the market moves against your position. 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 how lots are traded, it starts to come together for you. Foreign Currency Trading can be quite profitable and an exciting way to invest. Since “pips” are only US $1 for every US dollar currency pair, there’s no fear of great losses.

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