FOREX LEVERAGES, MARGIN, LOTS AND PIPS
Few words about forex leverages, margin, lots and pips.
Before new trader start with forex journey it is necessary to know some basic definitions. Terms like margin, leverage, pips and lots are anonymous for majority of forex novices. Knowledge of such titles is necessary to survive in dynamic Forex World.
forex trading leverage & margin
Leverage is one of the most important tools in forex market. This is something what makes possibilities for traders to earn some real money. On the other hand, it can be dangerous if trader makes impulsive and reckless decisions.
Forex leverage is a tool that gives an opportunity of entering into trades with even a small part of traders’ money. For example: if leverage is equal 50:1, it means that trader needs only 1$ for every 50$ traded. Similarly, when the leverage is equal 100:1, every 100$ can be traded with only 1$. Despite the fact the leverage can be used for earning money, it is extremely self-destructive tool in hands of gambler or impulsive trader. It gives an opportunity to come into big trades so the risk of account wiping out is also higher.
Margin is something strictly linked with forex leverage. This is some kind of border defined by broker which is minimal price needed to be placed up in case of any trades. Required margin is defined by size of the trade as well as leverage level. For instance, when the forex leverage is equal 50:1 and trader want to come in 5000$, the margin will be equal 100$.
During forex career traders will operate on different prices trades. Some of them will be higher when the rest will be relatively lower. Definition concerning amount of trading currency is so-called lot. Forex lots can be distinguished according to amount of trading currency on:
– Micro Lot which is equal 1000,
– Mini Lot which is equal 10000,
– and Standard Lot which is equal 100000.
In this way, when trader wants to buy 10000 of some currency pair it means it is necessary to enter with 1 Mini Lot.
Pips… Small but crazy!
Currency pair value is usually quoted with 4 or 5 decimal places. The fourth place is called as a pip. Its changes are crucial during forex transactions. Pips are used for operating on forex market. They are used for carrying out actions like entries or stops. Proper pip operations can result in profitable income and lower trade risk.
Forex beginners should start with some lessons of basic tools used in trades. Definitions like those mentioned above are solid base to build some forex knowledge. However, forex for beginners is not an easy task and some raw knowledge is important, but it must be support with solid dose of practice.