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CHAPTER 2 - LESSON 2
Pips and lots are two essential concepts in forex trading. Understanding these is crucial for calculating profits and losses, managing risk, and developing effective trading strategies.
Let’s define pips and lots below:
A pip is the smallest unit of price movement in a currency pair.
• Most currency pairs are quoted to four decimal places, and the pip is the fourth decimal place. For example, if the exchange rate of the EUR/USD pair changes from 1.1500 to 1.1505, this represents a movement of 5 pips.
• The value of each pip is determined by the currency pair being traded, the size of the trade, and the exchange rate.
A lot is the standardized unit of trading in the forex market. The size of a standard lot is typically 100,000 units of the base currency.
• This means that when trading a standard lot, the value of one pip is equal to $10 for most currency pairs.
• There are also mini lots (10,000 units of the base currency) and micro lots (1,000 units of the base currency) available for traders who want to trade smaller positions.
Understanding pips and lots is essential for calculating profits and losses in forex trading. For example, if a trader buys 1 standard lot of the EUR/USD pair at an exchange rate of 1.1500 and sells it at an exchange rate of 1.1510, they would have made a profit of 10 pips, or $100 (10 pips x $10 per pip).
Conversely, if the trader had sold the same lot at the same exchange rate and closed the position at an exchange rate of 1.1490, they would have made a loss of 10 pips, or $100.
When trading forex, it is important to consider the value of each pip and the size of the lot being traded in order to manage risk effectively. Traders should also be aware of the impact of leverage on their trades, as leverage can magnify both profits and losses. In the next section, we will explore another essential concept in forex trading: the bid-ask spread.
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Risk Warning: Margin trading involves a high level of risk, and may not be suitable for all investors. You should carefully consider your objectives, financial situation, needs and level of experience before entering into any margined transactions with Baxia Markets, and seek independent advice if necessary. Forex and CFDs are highly leveraged products which mean both gains and losses are magnified. You should only trade in these products if you fully understand the risks involved and can afford losses without adversely affecting your lifestyle (including the risk of losing the entirety of your initial investment). You must assess and consider them carefully before making any decision about using our products or services.
Baxia Global Limited is a company registered in Seychelles with registration number: 8426970-1, and is regulated by the Financial Services Authority of Seychelles with License number: SD104.
Baxia Limited is a company registered in The Bahamas with registration number: 177330 B, and is licensed and regulated by The Securities Commission of The Bahamas (SCB), (SIA-F234).
The information on this website is general in nature and doesn’t take into account your personal objectives, financial circumstances, or needs. It is not targeted at the general public of any specific country and is not intended for distribution to residents in any jurisdiction where that distribution would be unlawful or contravene regulatory requirements. Baxia Markets does not offer its services to residents of certain jurisdictions such as USA, Cuba, Sudan/Republic of Sudan, Syria, Iran, Iraq, South Sudan, Venezuela, Libya, Belarus, Afghanistan, Myanmar, Russia, Crimea, Donetsk, Luhansk, Palestine, Yemen, Zimbabwe and North Korea.