If you are new to Foreign Exchange (Forex) market, no doubt
you are confused by all of the strange and unfamiliar terminology. For example,
what is a pip? Also, you are already aware that Forex trading can be risky. How
can you limit your loss and best to protect your funds? This article covers how
currency lots are traded which in term to help you better understand how to
plan your trading strategy and manage your funds.
In Foreign Exchange (Forex), earnings are expressed in
"pips". Pip is called "Price Interest Point", which
measures the amount of change in the exchange rate for a currency pair. Whereas
the smallest denomination in USD is the penny ($.01), in Currency Exchange,
funds can be traded in an even smaller denomination, $0.0001. This means any small
movements in currency prices or pairs can create large profits.
Therefore, a PIP is the smallest unit a currency can be
traded in Forex market. The actual value of a pip will vary if you are trading
with a standard account, a pip is worth $10 and If you are trading a mini
account, a pip is only worth $1.
Your account size will determine the value of a pip, because the size of your account affects how
much currency you can leverage. A standard 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 size is 10,000 units of base currency. If you are
trading mini lots, you can leverage to $10,000. This is why a pip in a mini
size account is worth less than a pip in a standard size account.
Forex trading allows you to leverage more funds than you
actually fund or initial capital, this can be a double edged sword to Forex
traders. While you can make profits from this leverage, you can also have
losses amplified as well. There are several ways to manage the risk when
trading Forex. If you are interested in trading Forex, you need a trading
strategy. You also need educate yourself to know when to enter and exit the
market and what kind of price actions or movements to anticipate.
When you are placing
an order you must determine three
price points. First, you must define your entry price. Second base on your risk
and reward ratio, you must place the stop loss price and finally, your take
profit price or target price. Stop
loss price will protect your capital or fund if the price go against you. For example, if you are taking a long
position, you would place the stop loss order below current market price and
for a short position, you would place a stop loss order above current market
price.
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