When trading in the Forex market, it is essential to understand the terms and acronyms used. Two of the most critical acronyms are PIPS (points) and LOTS (lots).
PIPS stands for “points”. A point is a measure of price change equal to 1/100th of a percentage point. So, if a currency pair moves from 1.2000 to 1.2002, that would be two pips of movement.
LOTS stands for “lots”. A lot is a standardized trade size and is equivalent to 100,000 units of the base currency. So, for example, if you were trading EUR/USD, and you bought one lot, you would be buying one euro for every dollar.
What do you need to know?
The first thing to remember about the LOTS and PIPS is that they are both measures of movement in price, not absolute values.
Of course, if the EUR/USD moves from 1.2000 to 1.7050, it has changed by 70.5 pips (and will probably change by 70.5 points), but you cannot say that either point or lot represent this change precisely because they don’t take into account the value of the currencies being traded.
If the EUR/USD increased by 70 points, what does that mean? It means it increased by 5% similarly if the EUR/USD increased by 70 pips (or 0.007 LOTS).
What does that mean? It means it increased by 0.5%.
Keep in mind pips or points that a currency pair moves is not always the same.
Now that we know what pips and points are, how do we use them to calculate profits and losses?
Let’s say that you buy one lot of EUR/USD at 1.2000, and after a while, the price has moved up to 1.2006. You decide to sell your euros back and make a profit of six pips (or 0.006 LOTS).
If you bought your euros at 1.2006, you would have made a loss of six pips (or 0.006 LOTS).
To win in Forex trading, you must ensure that your profits are more significant than your losses, and that’s where the concept of leverage comes in. With leverage, you can control a larger amount of currency with less money.
So, for example, if you had 100:1 leverage, that would mean that for every $1 you have in your account, you could control $100 worth of currency.
This is why it’s vital to always trade with a stop loss in place because if the market moves against you and your losses exceed the value of your account, you will lose everything.
To maximize your trading profits and minimize your losses, you need to ensure that you’re continually trading with the latest information.
For this reason, we recommend that all FX trades are carried out via MetaTrader 4 (MT4).
MT4 is available through most forex brokers, including Saxo Bank. We offer both web-based trading and a downloadable version for Windows computers running XP or later.
MT4 is the world’s most popular platform for Forex traders because it allows you to trade on nearly any market in the world, giving you plenty of opportunities to diversify your trades and increase your chances of success.
Unfortunately, even with the best forex broker and the most advanced trading platform, there are no guarantees in the Forex market.
No one can predict with 100% certainty which direction a given currency will move in, and this is why it’s essential to always trade with a stop loss in place.
This means that you’re never risking more money than you’re prepared to lose.
In addition, because the FX market is volatile, it’s important to remember that you can substantially magnify your profits and losses if you’re using high leverage.
This means that the amount of money you might make on a one-point increase in the EUR/USD could be significantly more if you have the leverage of 50:1, for example. However, it also means that your losses would be magnified as well.
If you’re prepared to accept that profits and losses can happen very quickly, then Forex trading is a gratifying way to earn an income from home.
Depending on your available resources, it’s possible to trade part-time or full time. Saxo Bank offers different accounts with varying trading conditions on a forex trading platform designed to suit all experience levels.