What is Pip?
Pip, short term for “price interest point”, is the small change in the value of a currency when traded to another. An increase or decrease in pips represents a profit or loss in your trade.
When currencies are quoted, they are quoted in four decimal places or 0.0001. An exception to this is Japanese Yen currency pairs, which are quoted in two decimal places, and the following commodities: gold, oil, brent and gas.
What is Bid and Ask Price?
If you have notice the live spread widget beside, you’ll notice that each currency pairs has Ask and Bid price. Bid is the selling price, while ask is the buying price.
When you want to purchase a currency pair, you have to pay using the price quoted in Ask price. And vice versa.
What is Pip Spread?
The difference between the Bid and Ask price is known as spread. This is what the broker receives as a fee for handling the transaction. It must be noted that the spread differs for each currency pairs. The more liquid the currency pair is, the lower the spread.
Here are the following spread used in Forex Trading:
- Fixed Spread
- Variable Spread
The difference in these two types of spread is the dependence on market condition. As the name implied in fixed spread, the difference between Bid and Ask price is kept constant and is not dependent on the market price. Variable spread, on the other hand, moves depending on market conditions.
What is a Lot?
A standard lot is equivalent to 100,000 units of the base currency. The minimum amount of lot is defined by the brokerage company, while the maximum is limited by the deposit size. Other lot sizes in Forex are:
- Mini lot = 10,000 units of base currency
- Micro lot = 1,000 units of base currency
- Nano lot = 100 units of base currency
During Forex trading, you’ll be asked on the number of lots you’ll be trading. This is referred as lot size.
What is Leverage?
With leverage, your Forex broker allows you to trade higher than the amount you have deposited. For example, you have deposited USD1,000 and chose a leverage of 100:1. This mean your USD 1,000 is now equivalent to USD100,000.
Here are the common leverage ratios: 50:1, 100:1 or 200:1. Leverage ratio available differs from broker to broker.
Leverage can make the trader profit significantly, but it can also cause a significant loss if the trade went to the opposite direction of your position. It is recommended to practice good money management in order to avoid big loss to your account.