If you are new to the Forex market, you will undoubtedly be confused by all the strange and unfamiliar terminology. For example, what is a pip? You probably also already know that forex trading can be risky. How can you limit your loss and best protect your capital? This article will briefly explain how currency lots are traded so you can better understand how to plan your trading strategy and manage your capital.
Price Interest Point: Pip
In currency trading (FOREX), profits are expressed in "pips". Pip is the abbreviation for Price Interest Point, also called points. While the smallest denomination in USD is the penny ($.01), in forex trading funds can be traded in an even smaller denomination, $0.0001. This means that very small movements in currency rates can lead to large profits.
Thus, a PIP is the smallest unit in which a currency can be traded. The actual value of a pip is not a fixed price. If you trade with a standard account, one pip is worth $10. If you trade with a mini account, one pip is worth only $1.
The value of a pip
The value of a pip depends on the size of your account because the size of your account affects how many currencies you can leverage. A normal full-size trading account has 100,000 units of the base currency. If you trade in USD, a standard account has a value of USD 100,000.
A mini lot consists of 10,000 units of the base currency. When you trade mini-lots, you can use a leverage of 10,000 USD. Therefore, one pip on a mini account is worth less than one pip on a full-size standard account.
When trading forex, you can use more money than you actually have, but this can be a double-edged sword. While you can make profits with funds you leverage (and do not own), you can also suffer losses. However, there are several ways to manage your risk when trading forex. If you are interested in forex trading, you should have a clear trading strategy. You need to know when to enter and exit the market and what movements to expect.
stop-loss
You can also place a so-called stop loss order. Stop loss orders are the typical way traders minimize risk when placing an entry order. A stop loss order allows you to exit your position when the currency rate reaches a certain point.
If you are taking a long position, you would place the stop loss order below the current market price. If you take a short position, you would place a stop loss order above the current market price. This technique allows you to manage your risk and, as the name suggests, stop your losses at a certain point.
As you can see, forex trading can be very complex, but once you understand the basic principles of how lots are traded, the whole thing will fall into place for you. Forex trading can be a very profitable and exciting way to invest.
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