When it comes to the currency market, the actual sizes of the trades that are going on can essentially be quite confusing. Not only is there a bit of lingo you need to learn, but you’re also going to be dealing with figures that you may be unfamiliar with.
To start familiarizing yourself with the sizes of trades in the currency market, the first sort of figure you need to be conscious of is the exchange rate. Where you may be used to exchange rates that are only two decimal places long, i.e. 1.42, you’ll find that when it comes to currency exchange, they’re 4 decimal places long, i.e. 1.4267.
The littlest decimal place, i.e. $0.0001, is sometimes known as a pip or point. Both are truly short for ‘Price Interest Points’.
So if you have heard people talking about how a currency increased by ‘10 pips’, that just implies it increased by $0.0010. Naturally, in the forex market plenty of the trades that go on are pretty large in size, and so for an investment of $100,000, a single pip’s worth of change is worth $10. Therefore an increase of ten pips would be a profit of $100!
Mind you, this pip price that we’ve been debating does vary from currency to currency. In the examples above, we’ve been talking about how it applies to the US Dollar, but for other currencies it may differ depending on how the currency is traded.
Overtly, you’re not going to be ready to remember the pip value for every world currency ( unless you really are enormously experienced, or have an incredible memory ). In all honesty, you actually do not need to though.
Knowing the jargon and appreciating forex trade sizes is helpful, simply because it will permit you to wrap your head round the trades that are going on, and that you are undertaking for yourself.
For the common currencies, you may even find that as you become familiar with the forex market, you unavoidably end up recollecting their pip values.
On the other hand, for other currencies you might just look them up on an as-needed basis.
What you want to appreciate most though is that the pip cost of various currencies will play a role in the ‘lots’ that you can buy. For instance, a currency pair with dollars as the second currency ( i.e. The one being traded into ) always has a pip price of $10 per lot, or $1 per mini lot.
essentially, this suggests that you’d be trading in tons of $100,000 or $10,000.
Identifying rules such as that will help you to determine what you can invest and where you can invest it. After that, it’s all just a matter of picking what you feel will be profitable, based mostly on the options that you have available.
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