Since currency pair prices constantly fluctuate up or down these currency movements are measured in “PIP's”. A Pip is generally the fourth decimal place in an exchange rate. For example, if EURUSD is currently trading at 1.2980 and then the exchange rate changes to 1.2990, the pair rose by 10 Pips.
If EUR/USD depreciated from 1.2922 to 1.2921, then the pair dropped by 1 Pip which is 0.0001 of a unit. However, there are currency pairs like USDJPY (98.45) where the Pip is the second decimal place.
A Lot represents 100,000 units of the base currency. If, for instance, a client is Long 5 Lots EURUSD it means that he/she has purchased 500,000 EUR in exchange for USD. The Spread is the difference between the price you can buy a currency pair, “the Ask price”, and the price at which you can sell a currency pair, “the Bid price”. The Ask price is always higher than the Bid but Spreads are minimal for the most actively traded pairs like EUR/USD, GBP/USD, USD/JPY,usually 3-5 Pips.
There are arrays of factors that determine how much a currency is worth. These include actual monetary flows (imports, exports) caused by changes in GDP, inflation, unemployment, interest rates, budget and trade deficits or surpluses. All these macroeconomic conditions affect the value of a currency because they regulate the demand and supply of the particular currency. If, for example, there is high inflation the demand for the particular currency will drop as its purchasing power is eroded.
1. The main reason why many people are attracted to Currency Trading is the extreme liquidity of the market which allows for more significant leverage than other financial instruments.
2. Currency movements are measured in PIPS and could be the 2nd or 4th decimal place depending on the pair.
3. These movements are just fractions of a cent e.g. if GBP/USD moves 100 PIPS that is just a $0.01 move.
4. For this reason the leverage is applied in order to magnify these minute changes and translate them into decent profits.
5. When dealing with amounts such as $100,000 small changes can result in significant profit or loss.
6. Therefore leverage is subject to your trading style and money management preferences.
7. However leverage has the potential to enlarge your profits or losses equally. The greater the leverage the higher the risk you obtain.
8. With a small leverage you can afford to give your trade breathing space.
9. A high leverage can quickly wipe-out your account if it goes against you.
10. Leverage is flexible and customizable. Trading profitably is not about making millions by the end of the month or year.
11. Be patient and methodical.