When we often read articles related to the Forex market, terms such as the pip, the lot, mini-lot, micro-lot, bid and ask appear. Next, we will know what these words mean and what they are used for.
What is the pip in the Forex market?
A pip is the smallest change a currency pair can have. For example, if the Euro/Dollar (EURUSD) is trading at 1.3215, that means that for each euro, they would give us 1.3215 dollars. If the EUR/USD moves to 1.3220, the difference is the number of pips the pair has moved.
For this Euro/Dollar quote, the pip is 5. This rule works for all major pairs except USDJPY (US Dollar/Japanese Yen), where the pip is to 2 decimal places.
Why is it counted in pips?
When you invest in the Forex market, for example, if you buy at 1.3215 and sell at 1.3255. Instead of saying, “I have won 0.0040 units of the pair”, what is being said is “, I have won 40 pips”. Once you get used to talking in terms of pips, it is much easier to express everything in pips.
Therefore, it is spoken in pips for convenience: I have won 40 pips, lost five pips, or the broker charges me three pips commission.
What is the lot in the Forex market?
The Forex market is an immense and highly liquid digital marketplace that deals exclusively in international currency trading. One of the key elements of Forex trading is the use of lot sizes, which refer to a grouping of trades into fixed, measurable amounts.
A standard lot in the Forex market consists of 100,000 units of a particular currency, while a mini lot contains 10,000 units or 0.10 lots. While dealing with more significant amounts has a potential for more considerable earning potentials, increased leverage can also magnify losses.
As such, traders must ensure they understand how to manage the risk associated with more prominent positions when selecting appropriate lots for their trading strategies.
In Forex, you hear about lots in these types of sentences: “I have bought three lots of GBPJPY”
One lot corresponds to one hundred thousand units of the base currency, also called the reference currency. The currency is written on the left side of the pair. The other currency is the counter currency, written on the right side.
If you buy 3 lots of GBPJPY, you are disbursing 300,000 pounds in exchange for those 3 lots of the British pound (GBP) – Japanese yen (JPY) pair. In this example, you are trusting that the pound will rise so that when you close the operation. get benefits.
What are mini-lots and micro-lots in the Forex market?
A lot is one hundred thousand units of the base currency. A mini-lot is ten thousand units, and a micro-lot is 1,000 units of the base currency. You usually work with mini or micro accounts because the initial amount to start investing is much less than in lots.
What is the bid and ask in the Forex market?
When the broker gives you the quote for a pair, it will give you a pair of numbers. For example, for the AUDUSD, he will give you a bid of 1.0701 and ask for a 1.0705 Bid.
If you want to buy the AUDUSD Australian Dollar/US Dollar pair, you will do so at 1.0705, and if you want to sell, you will do so at 1.0702. Each broker will show you the buy-sell prices in their own way.
How to convert pips to monetary units?
The pip value is calculated as follows:
- For each lot, a pip is 100,000 (lot) x 0.0001 (pip size) = 10 units of the currency against.
- For each mini-lot, a pip is 10,000 (mini-lot) x 0.0001 (pip size) = 1 contra unit.
- For each micro-lot, a pip is 1,000 (micro-lot) x 0.0001 (pip size) = 10 pence against.
It must be remembered that this is the case for all major pairs except USD/JPY.