What
are Pips and Lots?
In
Forex Market those who are trading and those who want to trade should know
about Pips and Lots, PIP is Derived from derived from a sentence “Percentage In
Point”. A Pip or a Point is the smallest unit of currency movements. A pip
represents a 0.0001 variation (either increase or decrease) in currency pairs
based on four decimals and a 0.01 variation in currency pairs based on two
decimals. For instance, when the price of EUR/USD increases from 1.3740 to
1.3799, it means that the price increased by 59 pips. Different currency pairs
have different pip values which are fundamentally founded on the correlation
between the changing currency rates. The computation of a pip is different
where EUR is the base currency (such as EUR/USD) compared to a currency pair
where EUR is the quote currency (e.g. USD/EUR).
The
price movements of currencies are normally shown by the number of pips. Movement
of one pip is equivalent to a certain amount of profits or losses in real investment
you made in each forex trade. Normally, the rate of a pip varies based on the
particular currency pairs that are being traded. The rate of a pip will only be
similar for currency pairs that have USD as the quote currency (the 2nd
currency in the pair). The reason for this is that whatever the base currency
is (whether EUR, CHF or AUD), the USD quote currency will always fluctuate at
the same rate.
Each forex trading transaction is
completed through separate contracts, which are also referred to as “lots.” The
typical size of one contract or lot is 100,000 units. This signifies that if
you acquire one typical sized contract, you will be able to control a base currency
with a total quantity of 100,000 units. Each contract is then subdivided into “pips,”
which pertains to the minimum price increment. Standard lots or contracts normally
have a pip value of $10, but if you are just starting with forex trading, you
can try the mini-accounts that some forex companies offer, wherein the lot size
can be as low as 10,000 units with pips amounting to just $1 or even less.
Compared to the stock market, the
forex trading market requires quite a lower margin, especially when you know
how to take advantage of leverage. In forex trading, you are not obligated to
actually purchase a currency, so you are able to trade it a later time. You can
technically open a forex position to buy or sell a currency even if you do not own
any of that currency. You can open a normal forex account through an Internet broker
by setting up a minimum deposit of $200. With the minimum deposit, you can start
trading in the forex market with a 1:100 leverage. That means that you can open
a position amounting to $20,000, but with an investment of only $200 and the
remaining $29,800 as a credit.
