Blog Forex Trading

Learn Forex Trading – What are Forex Pips, Lots, Margin and Leverage

Knowing and understanding the proper terminology within the forex market is essential in becoming a successful trader. In this article we discuss and define what are Forex pips, lots, margin and leverage?

Pips and Lots

Currency traders quote the value of a currency pair, and trade sizes, in pips and lots.
The term pip stands for “percentage in point”. It is the minimum price movement in the Forex market.

A pip is usually the smallest amount by which the value of a currency pair can change. Nearly all currency pairs consist of five significant digits and most pairs have the decimal point immediately after the first digit.


In example, when the value of the GBP/USD pair goes up by one tick (i.e. pip) the quote will move from 1.3536, to 1.3537, and the size of the movement is just one pip.

An important guideline for the beginning trader is to measure success or loss in an account by pips instead of the actual dollar value. A one pip gain in a $10 account, is equal, in terms of the trader’s skill, to a 1 pip gain in a $1,000 account, although the actual dollar amount is very different.

The smallest size in currency trading for professional traders is called a lot. For USD-based pairs, the lot size is 100,000. In other words, when you enter a trade with your margin account, the smallest amount that you can buy or sell is 100K, regardless of the size of your margin.

Margin and Leverage:

Another important concept in currency trading is the twin phenomenon of margin and leverage. This is a concept that carries a high degree of risk, but since forex prices move very slowly (in terms of the actual change in value), the vast majority of traders leverage their accounts when engaging in short-term trading.

When you open a forex account, the broker will request that you deposit a small sum, known as margin, as insurance against the losses that your account may suffer. With this small sum, you’re able to control a much larger amount, enabling greater gains, but also greater losses than you would be able to achieve with your deposit. It’s easier to understand margin and leverage in the context of a borrowing process. The lots that you can trade are borrowed from your broker, who requires a margin deposit as an insurance against losses. The ratio between the funds borrowed by you, and the margin that you deposit as insurance is called leverage. Thus, if you set a leverage ratio of 100:1, enabling the trade of 1,000,000 USD with just 10,000 USD in deposit, but eventually trade just 100,000, the actual leverage that you would be using is 10:1.

In order to understand how to manage your account you must gain a good understanding of leverage. Failure to pay proper attention to leverage and margin may result in a margin call and the broker may liquidate your position in order to ensure that your losses do not reach a level where your margin deposit is insufficient to cover them. Increasing leverage = increases risk.

Read more: Forex trading tips for  Beginners

Share :

1
Comment:

avatar
1 Comment threads
0 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
1 Comment authors
Dorothy Benjamin Recent comment authors
  Subscribe  
newest oldest most voted
Notify of
Dorothy Benjamin
Guest
Dorothy Benjamin

These people cannot process a withdrawal I invested $45,579.00 with the broker wise banc and won a bonus of $156,834.000 I wanted to make a withdraw and they can’t process it, I have been trying to get my money out since mid- July 2018. I have given them all my banking information: routing number, acct number … and they cannot manage to produce the withdrawal. I kept getting messages saying they are working on it, I wasn’t able to withdraw my money from the account, thought I was not gonna see this day but God so kind. I was able… Read more »