If you are new in forex trading business, then it is always recommended that you must hire a genuine broker or must take time to learn all the basic things regarding foreign exchange market. If you are looking for an easy solution regarding forex lots and pips, then you are in the right spot as this post related with lots and pips in forex.
Let’s not waste more word and get into the main topic.
What do you mean by pip in forex trading?
- Pip is referred as the smallest unit of price for currency pairs, given that the price of the unit is given in 4 decimal points.
- It is actually derived from comparing the starting rate till ending rate.
- In addition, profit and loss of a trader is also calculated on the basis of how many pips trader have gained or loosed.
- It is so because there are some forex brokers who used to quote price to the 5th decimal point and the lowest price unit in this context will be the 1/10th of pip which is known as pipette.
What do you know about the value of pip?
It is relevant to say that any given pair of currency involving USD will be having a pip value of one-hundredth of a cent which is around $0.001 along with the exception of USD/JPY. But it is also the value of pip always depend on the instrument.
USD/JPY is an exception because it is the only currency pair in which the value of pip is $0.01 which is one cent as the price has been quoted in two decimal points.
Let’s us consider an example.
For an instance, the exchange rate for USD/EUR is around 0.7272.
As the rate is quoted to the 4th decimal place so, one can easily use the formula of pip, and it is-
Pip = 1/10,000/ exchange rate
So 0.0001/ 0.7272 = 0.00013751
Thus the value of 1 pip for the currency pair of USD/EUR is around 0.000138.
Now heading towards forex lots, in the forex trading market ‘lot’ is one of the widely used terms by the trader and it refers to the least transaction amount for a specific currency pair. It is also evident that lot sizes are indicated in terms of the base currency for that pair.
Standard lot also refers to a standard size of definite financial instrument. It is also considered as the prerequisites for the forex newbies to get started with.
In addition, it is also important to note that there are different types of forex lot types having different values. They are:
- Standard lot – having 100,000 units of base currency
- Micro lot – having 1,000 units of base currency
- Mini lot - having 10,000 units of base currency
- Nano lot -having 100 units of base currency
Let’s take an example.
For USD based currency pair, lot size is 100,000. So when a trader enters a trade with a margin account, then least amount the trader can purchase is 100K, irrespective of the size of margin. So this is it in forex lots and pips.
Enjoy safe and secure trading because always remember that- Knowledge gained is profit earned in forex trading!