What is Volume?
17 August, 2021
What is scalping?
17 August, 2021

Basic Trading Notions

There are many different instruments, tools and concepts in the world of currency trading. From technical indicators, candlestick patterns, backtesting, trading styles and much more. However, there are three important concepts that you will always see, from the most basic theory to the most advanced levels of trading, these concepts are Pips, Lots and Leverage.

What is a PIP?

The PIP or point, as it is also known, is the smallest variation experienced by the price of a currency pair.

The PIP is read differently in some currency pairs, for example, in the pairs associated with the Japanese Yen (JPY), the PIP is counted from the 2nd decimal place of the quote; while in the other currency pairs it is counted from the 4th decimal place of the quotation.

In the image we have examples of the pairs (USD/JPY) and (EUR/USD).

In EUR/USD, the PIP is counted from the 4th decimal place. If yesterday the pair was trading at 1.2040 and today it is trading at 1.2045, it means that the price of this currency pair has increased by 5 pips.

In USD/JPY, the PIP is counted from the 2nd decimal place. If yesterday the price was 102.68 and today it is 102.60, it means that the price of this pair has fallen 8 pips.

What is a Lot?

Lots are a unit of measurement that allows you to know the volume of the operations you carry out. There are three main lots that you should know:

  • Standard Lot: A standard lot represents 100,000 units of the base currency. The base currency is the one on the left in every quote. For example, in the quotation of the EUR/USD the base currency is the euro; in USD/JPY the base currency is the dollar. The currency on the right side of a quote is called the crossover currency.
  • Mini Lot: The mini lot represents 10,000 units of the base currency.
  • Micro Lot: The micro lot is a unit of measure that represents 1,000 units of the base currency.

Opening a trade in the forex market with a lot is not the same as doing a trade with a micro lot, we will see why shortly.

What is Leverage?

Leverage is a multiplier and we will see it in the next example.

As we can see in the image, we have two examples of leverage, 1 to 100 and 1 to 500. A leverage of 1: 100 means that your initial capital will be multiplied by 100 so that you can carry out operations of up to US $ 100,000 in the market.

You might be thinking that you should use as much leverage as possible, but be careful! It’s not convenient.

Leverage is also known as a double-edged sword because while it allows you to obtain greater profits than you would have access to only with your initial capital, but it also exposes you to greater losses.

How to calculate the value of the PIP?

Calculating the value of the PIP is important to know the profits and losses of each of the operations you carry out. The value of the PIP must be expressed in the currency in which your real account is located so that it is easier for you to calculate your earnings and loses.

We will teach you two quick ways to calculate the value of the PIP in any trade you place. You will also see an example of the calculation when the currency in which your profits or losses are recorded in your trading platform is the base currency and when it is the cross currency (in our case it is the dollar).

In this first example the dollar is the crossover currency.

In this second example the dollar is the base currency.

Well, now you know what the PIP is, what the lots are, what the leverage is and you have learned to calculate the value of the PIP in terms of the currency in which the money is registered in your real account. Congratulations!

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