Forex Trading can be somewhat very confusing when terms like PIPS, LOTS and LEVERAGE are introduced. Do not despair as this is the only way to understand FOREX fully, There are no shortcuts in FOREX TRADING.
We know PIPS and Spreads work hand in hand, Pip Spread is the difference between BID and ASK and Leverage is access to trade using borrowed capital, currency pair’s leverage odds can get up to 1:3000, depending on your broker, it is important to understand how PIPS, LOTS AND LEVERAGE work together in Forex – in a nutshell, Trading is done in currency lots.
Here’s a look at LOTS
Three Types of Lots
- Micro (0.01 lot – 1000 units)
This type of lot has an approximated amount of $1000 worth of foreign currency.
- Mini (0.1 lot – 10 000 units)
The mini slot gets up to $10000 worth of foreign Currency.
- Standard (1 lot – 100 000 units)
The standard slot gets up to $100000 worth of foreign Currency.
This means if you have a micro account you can trade in incremental of 1000 units, i.e 2000, 5000, whereas with a mini account you can trade in incremental of 10 000 units, i.e 60 000 units, 90 000 units. A standard account lets you trade in incremental of 100 000 units, i.e 500 000 units, 800 00 units, 1 000 000 units, etc.
Getting to understand PIPS
Pips are usually the last two digits behind the decimal – and you use pips to calculate your profit or loss. Pips are points – and these points are the difference between the selling price and the buying price – or the difference between the BID price and the ASK price and this is also referred to as a spread.
Because the market is very volatile, the movement is bound to happen and thus there will be a change in your points, either in your favor or against you. Positive pips will always give you profit, whereas negative pips are your losses.
Say you purchase the EUR/USD at 1.3380 and by the end of the day, you closed the position by selling at 1.1390 – this means you’ve just earned 10 pips. if you have bought 10 000 units of EUR/USD on a 100:1 leverage.
0.0001 x US$10,000 = US$1 per pip, so this will give you US$10 for your 10 pips trade. Remember that not all pips will be worth a dollar, as this depends on a lot size like that with the example above, as well as how many lots and the currency pair as well as your account currency.
LEVERAGE – The best Forex Benefit
The ratio of invested amount relative to the trade’s actual value is known as leverage. Forex Brokers across the world offer traders with an option to trade with borrowed capital and so, you don’t have to spend insanely a lot of money to make a lot of profit – leverage gives you an opportunity to make substantial profits but it can also cause substantial losses.
in a 1:3000 leverage, means for every US$1 you invest in the money, your broker invests US$3000 for you. The higher the leverage the larger the profit or the larger the potential losses.
You don’t need US$100 000 to execute a 1 lot standard size because it is actually worth that much – and so with leverage, you are given an opportunity to trade positions worth a lot with the minimal amount of your deposit.