(ThySistas.com) Forex is a trading platform that is commonly known for buying and selling currencies. When you are in the Forex market as an active trader you already know the terms that are used here, and if you are a new trader or just have taken the decision to be a trader, then you should know some important terms that are used frequently in a Forex market. For example, you may have heard about ‘lot’, Pip, pipettes, leverage, spread, etc., but don’t know what these terms mean and what is their work in the Forex market. Here we will be discussing some of these terms so that you can have a clear idea about them.
What is meant by lots?
The number of currency units that a trader buys or sells is called lots. By ‘lot’ we mean a unit that helps us to determine our trading volume. When traders place orders on their trading platform, their orders are placed in sizes quoted in lots. 100,000 units of currency are the standard size for a lot. Now some other sizes of the lot can be found, they are mini, micro, and nano and their sizes are 10,000, 1,000, and 100 units.
Some brokers show ‘lots’ quantity and some show the actual currency units. The currency can be changed in minutes and by taking advantage of this change in value, you can trade with a big amount and live your life.
The changes in currency value are measured in pips. Lot defines the value of each pip in terms of the dollar. Suppose, you have bought a trade in the EUR/USD pair with 0.1 lot. So, in this case, the value of each pip is $1. In case you increase the lot size to 0.2 lot, the value of each pip is $2. So, if you buy EUR/USD 1.12230 and the market move higher to 1.12330, you have 10 pips move in the upward direction. So, if your lot size is 1, it means the value of each pip is $1. So, for 10 pip, will make $1×10 = $10 profit.
To make things easier, consider using a 100,000 unit (standard) lot size. Now we will go through some examples and learn about the pips values. Pip values differ from the lot size. Unless truly understand this factor, you will not be able to deal with the upcoming IPOs with a high level of precision. Your broker may have different aspects for calculating pip values according to lot size but you need to have an idea about the pip value for your trading currency at that particular time. The brokers do all the math and calculation for the traders.
When the market change, the pip also changes. The changes in the pip depend on the currency that you are trading now.
What is leverage
Leverage means the money that is borrowed from the Forex broker. When traders feel that they lack the capital to invest for big trading they take leverage. Thus, it creates the opportunity for a vast profit and trader get an open position. But, traders should not be inspired to take leverage after learning a few benefits of leverage. Before you have decided to earn profit by leverage you should know the disadvantages of it. Many traders, who are new to the trading platform, often lose their position because of leverage. By taking leverage if you can make profits, then it is will prove beneficial for you, but no one can guarantee the loss and profit in trading. Many traders have to face continuous loss for having no proper knowledge about leverage.
Bid / Ask spread
When you buy a currency, you buy it at the offered price or ask price and when you sell the currency, it will be called bid price. Spread shows the difference between the ask and the bid price.
Staff Writer; Lisa Love