Beginning Forex - How Are Lots Traded And also What The Heck Is a Pip?
If you're new to Forex, no doubt you're confused by all the strange and not familiar terminology. For instance, what's a pip? Furthermore, you are most likely already aware that Forex trading could be risky. How can you limit your loss and best protect your funds? This article in brief addresses how currency lots are traded to assist you better understand how to plan your trading strategy and manage your funds.
In Foreign Currency Exchange (Forex), earnings are expressed in "pips". Pip is short for Price Interest Point, also known as points. While the smallest denomination in USD is the penny ($.01), in Currency Exchange, funds could be traded in an even smaller denomination, $0.0001. What this means is that very small movements in currency prices can create huge profits.
Thus, a PIP is the smallest unit a currency could be traded in. The actual value of a pip is not a set price. If you are trading with a standard account, a pip is worth $10. If you're trading a mini account, a pip is just worth $1.
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.
A mini lot is 10,000 units of base currency. If you are trading mini lots, you can leverage $10,000. This is the reason a pip in a mini account is worth less than a pip in a standard full sized account.
Although Forex trading lets you leverage more funds than you actually have, this could be a double edged sword. While you can make profits on funds that you leverage (instead of own), you can also have losses increased also. There are numerous ways, nevertheless, to manage your risk when trading Forex. If you are interested in trading Forex, you need to have a definite trading strategy. You must educate yourself to know when to enter and exit the market and what type of movements to anticipate.
You can also place something known as a stop loss order. Stop-loss orders the typical way traders lessen risk when placing an entry order. A stop-loss order to exit your position if the currency price reaches a particular point.
If you're taking a long position, you would place the stop loss order below current market price. For a short position, you'd place a stop loss order above current market price. This technique lets you manage your risk and, just as the name implies, stop your losses at a particular point.
As you can tell, Forex trading can be complex, but once you understand the basic fundamental principals of how lots are traded, it begins to come together for you. Foreign Currency Trading can be very profitable and and exciting way to invest.
Article Source: FxTradingStock.com
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by: Jonathan F. Pratt
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Date: Sat, 12 Feb 2011
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