Pips & Lots – Forex Trading Explained: If you’ve transacted in the forex market, you must have heard the words ‘lot’ & ‘pip’. While pip is related to the percentage change of the price in the market, a lot is the trading volume. Both the terms are very significant and can affect the risk of the trade.
Here in this article, we would get to know the terms ‘pip’ and ‘Lot’. This blog will help you understand how pip and lot can affect your trade, and at last, we would end it with a short conclusion!
A pip stands for “percentage in point” and is the measuring unit for the price change of currency value in the forex trading market. It is the smallest value change a quote currency can make and usually is $0.0001 or 1/100 of 1%. This $0.0001 is one basis point and is a standardized unit for currency trading or value change.
For example, let’s assume we have a quote of USD/YEN of 107.8967. In other words, for one unit of the US dollar, we will get around 107 Japanese Yens.
Now, if there is five base point or pip change in favour of the Japanese Yen, then the value would become 107.8962. And, as a result, for less Japanese Yens, One will get more dollars!
This 4-decimal point change might look very small to you, but when trading in huge volume, it can help you earn good profits.
Generally, one can’t just buy one unit of currency pair; he has to purchase them in lots.
Now, what is a lot?
A lot is a fixed, minimum number of units set by any regulatory body for trading. In other words, it is the smallest size of units; one needs to purchase to trade in the forex market. A standard lot size is of 100,000 units; however, there are other small sizes also available for trading. Following is the list:
Mini Lot – 10,000 Units
Micro Lot – 1,000 Units
Nano lot – 100 Units
When a trader purchases a lot, it means he’s purchasing that much units of currency. For instance, if you will purchase two mini lots of USD/INR, then just a 500 base point change, i.e. $0.0500, change in favour of the US dollar can get you $500 profit.
In the forex market, all currencies trade in lots and traders buy the currencies of the nation, which they think will become stronger these days. It is like a foreign investment, but for the short term.
Summing Up – Pips & Lots
Forex market is affected by several explicit and implicit factors. A trader should keep in mind that thing, and then decide his actions, with due diligence. Just predicting where the prices will move is not enough. One should have the required skills and knowledge to use different tools and techniques.
Pip value is not fixed; it varies from currency to currency. Moreover, a lot’s size can indicate your risk tolerance—bigger the lot size, more the risk but, more the profit or loss too.