Currency Trading: Pips, Lots & Stop-Loss Orders
What are Pips?
In the currency trading it is vital things to understand what is a pip because you must be apply pips in estimate your profits or losses. Elaboration of ‘pip’ is ‘Percentage in Point, sometimes referred as ‘point’. A pip is the smallest price movement of a traded currency. For most currencies a pip is 0.0001 or 1/100 of a cent. 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. Though it seems that value of a pip is very low but it take consideration that most currencies are traded in lots of $100 000. For that amount a pip is $10. When a currency moves from a value of 1.4511 to 1.4514, it moved 3 pips. When a pip has a value of $10, you have gained $30.There is an exception for quotations for Japanese Yen against other currencies. For currencies in relation to Japanese Yen a pip is 0.01 or 1 cent. Then if you are trading USD/JPY in $100 000 lots, one pip will be equivalent to $1000.
What is Lot?
Lot means the minimal traded amount for each currency transaction. For the Regular Accounts one lot equals 100 000 units of the base currency. You can also open a Mini Account and trade in mini lot sizes that are 10 000 units of the base currency.
What is Pip Spread ?
Spread is related to pips. It is very importance for forex traders. There is always difference between the selling and buying price of a given currency pair. There are two types of price of currency, i.e. ask price and bid price. The ask price of a currency at which you want to buy on other hand bid price is that price at which you want to sell. For example, the EUR/USD is quoted at 1.4505 bid and 1.4508 ask. In this case the spread is 3 pips. The pip spread is your cost of doing business here. In the case above it means you sustain a paper loss equal to 3 pips at the moment you enter the trade. Your contract has to appreciate by 3 pips before you break even. The lower the pip spread the easier is it for you to profit. Generally the more active and bigger the market, the lower the pip spread. The smaller and exotic markets tend to have a higher spread. Most brokers will be offering different spreads for different currencies. The account which are operated small amount of money usually they have higher spreads. On other hand of which account operated good amount of money, they have lower spread. You may find a broker offering a pip that is lower because it is sound for your profit though low pip spread is not everything for currency trading. Everybody want to make profit trading as well as protect his fund. In this connection you may understand currency trading strategy and basics of them.
Your currency Trading strategies:
You may invest in currency trading both your own sources of fund and loan from other sources. Though currency trading allows you to pull more funds than you actually have, this can be a double edged sword. While you can make profits on funds that you pull (rather than own), you can also have losses amplified as well. There are some 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. You can minimize your risk by placing stop-loss orders. When currency price reaches a certain point a stop-loss order ensure your position to exit. 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. In fact it is a safeguard for your investment in currency trading. You must have a mechanism in your trading strategy to protect your fund effectively and efficiently.
Currency trading seems to be sort of complex but when you educate enough yourself for fundamental principles, basics and trading strategies you will find currency trading is one of the exciting ways to make money.
