Forex Trading Concepts

What is Pip?

The ratios of currencies in forex usually have five digits after the floating point (The JPY/USD pair has only three digits after the floating point). In almost all currency pairs, pip refers to the fourth digit after the floating point, meaning that if the fourth digit after the floating point is changed by one unit, then the price change is one pip. In JPY/USD, pip refers to the second digit after the floating point. So if the EUR/USD rate changes from 1.13456 to 1.13466, the price change is one pip. Note that there is also pipette that refers to the fifth digit after the floating point. For gold, the pip refers to the second place after the floating point, but its definition may vary from one asset to another.

What is Lot?

Lot is the volume measurement unit in Forex. It refers to a standard size that varies from pair to pair. In currencies, one lot equals 100,000 units of the base asset. For gold, one lot equals 100 ounces of gold. If you want to buy one lot of Euro and the rate of EUR/USD is 1.23456, then you need to pay $123456 (100000 * 1.23456 = 123456). The number of base currency in a lot is called the contract size. the contract size of all currencies are 100,0000 and the contract size of gold is 100. In other words, one lot equals contract size number of the base currency or asset in Forex.

What is Leverage?

Leverage multiplies your purchasing power by its value. For example, if your account's leverage is 30, and you have 30000 ( 1000 * 30 = 30000). As the leverage increases, you can open more positions because you can buy more lots. While this seems an advantage at first glance, it might have terrible outcomes! When you are allowed to open more positions, you engage more of your funds in trading, which may ultimately lead to painful losses. To this end, most brokers limit account leverage to 30, but you need to check your broker and see what the leverage value of your trading account is.

How to Calculate Profit and Loss with Pip and Lot?

To calculate your profit or loss, use the following simple formula:

For example, if you make 10 pips of profit in a trade on EUR/USD and you had 0.01 lot in that trade, then your profit is:

10 * 0.01 * 100,000 * 0,0001 = $1

What is Balance?

Balance is the amount og money you have in your account.

What is Equity?

Equity is the sum of the profit and loss of all open positions and the balance. It shows how much money is in your account, including the initial money and all the profits and losses of open positions. Note that when you have no open positions, your Equity matches your Balance

What is Margin?

A position's margin is the amount of money you need to open a position