What is pip?
What is lot?
The first two questions asked by majority of new Forex traders when they start to learn all the basic factors of forex trading. This article is designed in a way that it will definitely clarify what is pip and lot and how they are implemented in Forex trading.
What is Pip and What is lot in Forex Trading?
To enter the world of Forex, the first fundamental lesson should be to understand perfectly what pips are and what is the concept of lot in Forex Trading? If you are roaming around the Forex learning process for some moments, surely you’ve heard those terms on several occasions. Although it may seem that these are very simple concepts, but before you start live trading, there are lots of things about pips and lot you must know.
What is pip?
Forex pip is the minimum price movement of a Forex trading pair, based on which, profit or loss from a trade is calculated. Usually, we get 4 decimals while showing a price quote of a definite pair. However, pip is the last decimal (4th decimal) in the price of a given pair. Please note that in case of the most major pairs, pip is the 4th decimal, but in case of dollar/yen, pip is the 2nd decimal.
That is, if the euro/US dollar is traded in a determined moments of 1.1352 price quote, i.e. every euro equals to 1.1352 US dollar, the pip would be 2. In the case where the price moves from 1.1352 to 1.1355, the movement of the price corresponds to 3 pips.
What is Lot?
Currency Units bundled in a single entity is lot. Forex currency pairs are traded in lots. There can be 4 different form of lots:
- 100,000 units of the base currency = Standard lot
- 10,000 units of the base currency = Mini lot
- 1,000 units of the base currency = Micro lot
- Flexible lots: you may find some brokers offering customized lot size. In this case you could choose your lot size as for instance it could be 0.5 of a lot, 1.2 of a lot, or any other number of units that suits you.
If you traded 1 standard lot of the currency pair USD/JPY, you’re trading $100, 000, if you traded a mini lot it is $10, 000, and if you traded a micro lot it is $1,000. In short, a lot simply indicates how much of currency you are trading in that lot. Remember it is the base currency we are referring to when we talk of lots.
The choice of different lot sizes allows you to fine tune your trading style. For example if the invested funds in your Forex trading account is on the smaller side, having an account with a dealer who offers micro or fractional lot sizes helps keep your risks on the lower side..
So, Choosing Forex broker with reasonable pip and lot is a crying need for every trader. We would like to recommend that you start trading with HYCM Broker where minimum reasonable spread and lot size available with superior trading conditions for trading online.
How much is each pip depending on the lot?
Putting the two concepts(pip and lot) together, we can really get to know how much money each pip assumes when the price of a pair moves, depending on the amount of lot, with which we are trading.
Thus, in the major pairs (except the USD/JPY), trading with lots, every pip involves 10 units of the currency. While trading with mini lots would be 1 unit, and doing it with micro lots only 10 cents. Dividing this value of price by the pip, we get the pip value in the base currency.
That is, if you buy 1 lot of EUR/USD and trading gains 50 pips, we are talking about a profit of $ 500, lowering it to $ 50 if we bought a 0.1 lot and it will be only 5 dollars if you bought was a micro lot or 0.01 lot. For the pip value in euros, we divide these values in dollars for the price of the current pair. If the EUR/USD is 1.1352, for example, $50 would become 44.0451 euros.
Now-a-days, almost every broker is offering trade opportunity with micro lots. To limit losses during learning, the micro lots are most efficient tool of the Forex traders.
If you need to know more on currency pairs, consider this article on Forex trading Currency pairs.
While placing Forex trade using a trading platform, you are only speculating on the currency exchange rate and not actually buying all that currencies. Therefore, when you speculate the movement of currency rates accurately you make a profit, otherwise not. Learn more on What is leverage in Forex to have a better understanding on this topic. This concept is originated from this belief that speculation in currency positions can be met without real money supply.
Another thing you must understand that before we learn about Margin trading and Leverage, its important we try to understand what is spread in forex trading
|Chapter 2||Forex Trading Basics|
|Lesson 1||Forex trading Currency pairs|
|Lesson 2||What is pip|
|Lesson 3||what is spread in forex trading|
|Lesson 4.||What is leverage in Forex|
|Lesson 5||Forex Trading Order Types|