[simple_series title=”Forex Beginners”]
Pip is another subject that all traders should master. Pip values—for exact explanation—are very important to acknowledge.
Pip is the measurement unit for conveying value changes between the two traded currencies. A pip is the quotation’s last decimal place and it is considered as the currency value unit’s small percentage. Every trader can take advantage of value change as long as he or she is trading in large money amounts on certain currency. This can show noteworthy profit or loss.
Let’s take a look on the example:
When GBP/USD rises from 1.3000 to 1.3001, it means that there is a value rise of the USD for .0001 and it means one pip. Now, let’s make an assumption in which we are going to use a standard 100,000 unit lot. Recalculating needs good concentration and you should follow carefully. The pip value always changes based on the fluctuation of currency rates.
In this case, GBP/USD has different formula in calculating PIP because USD is not the first quote. GBP/USD at an exchange rate 1.5594 (.0001/1.5594)x100,000 = 6.41 x 1.5594 = 9.995754. The amount is rounded up to $10 per pip.
These days, traders find it easy in using pip calculator in which they can simply choose the currency pair available at the drop list. They only have to fill the current cost and contract size, and..voila!! you will get the result of the pip value based on the currency pairs selected.
Another Step: Leverage
Starting forex trading with small capital may look impossible though it is applicable. This is how a trader uses leverage. For example, you only have $1,000 and your broker will ‘lend’ you $100,000 for buying currencies. The broker will hold the $1,000 for deposit, but he is not necessarily keeping it. The exact leverage amount depends on how a trader and his broker make a deal. ‘Initial margin’ is the term for deposit for trading that a broker will require. Once a trader deposits his money then he can trade right away. Definitely, it is the broker who can denote how much they need to trade as per lot or position.
Let’s take a look at this example:
You need to trade for $10,000 and you only have a half of it. Your broker can ‘lend’ you $500 for the ‘margin’ or the down payment. The rest will be for you to borrow. Definitely, your account will be added or reduced based on either gains or losses to the cash balance which is remain on your account. The percentage of margin is different from one broker to another, and this should be discussed beforehand.
What Will be The Next Lesson
You have learnt some terms and calculations for trading foreign exchange. Next, you will learn about the foreign exchange market structure. You will find out that there is a more versatile way in trading currencies and there is a different market structure like the one in stock market.