Just like finance, the forex world has its own language and has its own exclusive jargon that needs to be understood in depth in order to succeed in the market as a forex trader. The mechanics and the functioning of a forex market are very different from other markets and some of the unique concepts upon which forex trading is based on are Pips and Lots.
Without understanding the basics and use of these two terminologies and the concept behind them, we recommend that you do not even think about trading. Once you are comfortable with these, then only you should take your first step towards trading.
Here in this article, we have explained the basics about pips and lots that you need to know as a forex trader.
What is a Pip?
Pip stands for ‘percentage in point’ or ‘price interest point’. It is a unit of measurement that is used to express the change in value between a currency pair. These changes in value are due to small movements in price because of which you would be able to determine the profit that you have made on a particular trade.
The last decimal place of the price of a currency pair, which mostly is up to four decimal places, is known as a pip. Except for Japanese Yen, which goes out to two decimal places only, all prices go out to 4 decimal places.
For example, the EUR/USD is currently trading at 1.3042. The last digit 2 is a pip, and if the price goes up to 1.3043 then the rise in value is said to be one pip.
What is a Lot?
Previously, spot forex was only traded in terms of lots, which is a specific amount of a currency that you want to buy or sell. It is the smallest group of currency pairs that you can easily trade in the market with the help of your broker.
There are different sizes of a lot that have been clearly defined in forex for the ease of doing currency trading. A standard lot size is considered to have 100,000 units of currency, a mini lot size to have 10,000 units, a micro lot size to have 1,000 units and a nano lot size to have 100 units of currency.
These lots are able to define your minimum investment and able to determine the value your trades, whose value might vary because of the volatility in the prices of currency pairs and because of the broker who you are using to make trades on your behalf.
Since lots are used to trade currency pairs in the forex market and a small movement in the price of a certain currency will cause a change in the pip points. Therefore, we can say that pips and lots go hand in hand. You need to have a complete understanding of both concepts to set the stage for knowledgeable forex analysis and trading.