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Pips and Lots in Forex

Any forex beginner finds references to the currency trading pip. Your wins and losses are calculated in pips. Also the forex spread (the difference between the bid and the ask price) is evaluated in pips. Actually, the spread is how the the ECN brokers make money (Types of Brokers). PIP stands for Percentage in Point (otherwise, price interest point). It is the least increment of changes in rates of the currencies. The introduction of such a unit enables us to evaluate a climb or a drop in the currency values in percentage.

An obvious reason is that in Forex there is no base currency in which to express values. The United States Dollar may be the most frequently traded currency but it is not involved in all trades.  For instance, you may trade EUR vs. GBP or any other permutation that does not involve USD. Therefore,  we need a unit that is a percentage of the value of whichever currencies we are doing the trade with. In turn, it means that the financial denomination of a pip depends on the currency. The currencies are quoted to 4 decimal points.  Therefore, the smallest increment  is 0.0001 and this is one pip relative to this currency. For instance, the bid price for EUR/USD quoted at 1.3641 and ask price 1.3645.  Hence,  the spread is 0.0004 or 4 pips.

 It is important that when the forex beginner understand the relationship between the pips and the actual currency.  A one pip gain in a $10 account, is equal to a 1 pip gain in a $1,000 account, however the actual dollar amount is very different.The smallest size in forex trading is called a lot. For professional traders on the USD-based pairs, the lot size is 100,000 units.  However, many brokers allow mini and micro lots. The mini lot is 10 000 units and the micro lot is 1000 units.Mini and micro lots are often offered to beginners of forex who open small accounts from $100 to $1000.  The smaller the lots size traded, the lower will be profits, but also the lower will be losses. Consider a standard lot of  $100, 000. In this case the trader risks to lose (or looks to win) $10 per pip.  With every mini lot traded ($10, 000)  the trader risks to lose (or looks to win) $1 per pip, the micro lot  allows $0.1 per pip.