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How
Are Lots Traded & What The Heck Is A Pip?
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.
About the Author:
Amber Lowery
For more FREE Forex Training Articles, visit: Forex
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