PIPS and LOTS for Novice Forex Traders | Overview

Are you looking for ways to demystify PIPS and LOTS for novice FOREX traders? PIPS and LOTS are two important concepts that every novice FX trader should understand.

First, PIPS is an acronym for “Percentage in Point,” while a “LOT” refers to the size of a transaction. In other words, the former is a unit of measurement used to calculate profits or losses in currency trading, while the latter is the actual amount being traded.

Why is PIP or LOT Important in Trading?

Aside from being essential in calculating your gains or losses, knowing how much each PIP or LOT is worth can also help you determine your risk exposure. You can use this information to set a stop-loss, take-profit levels, and place orders more accurately.

What is a PIP?

As mentioned earlier, a PIP is an acronym for “Percentage in Point.” It is the smallest change unit in an exchange rate and is typically used to measure the fluctuations in currency pairs. For most major currencies, a PIP is equal to 0.0001, except for the Japanese Yen, measured in 0.01 units.

For example, the EUR/USD exchange rate is currently 1.2300 and rises to 1.2305. In this case, we can say that the EUR has gained five pips against the USD. Similarly, if the EUR/USD exchange rate falls from 1.2300 to 1. 2295, we can say that the EUR has lost five pips against the USD.

What is a LOT?

As for LOTS, this refers to the size of a transaction or position. In other words, it is the amount traded in a single deal. A standard lot equals 100,000 units of the base currency, while a mini lot is 10,000 units and a micro lot is 1,000 units.

Not all brokers offer all three types of lots, but most will at least provide mini and standard lots. Some even offer nano and variable lots which are even smaller than micro-lots.

What are the Benefits of using PIPS and LOTS in FX trading?

There are several benefits of using PIPS and LOTS in FX trading, some of which have already been mentioned. Firstly, they can help you more accurately calculate your profits or losses. Secondly, traders can use them to set a stop-loss, take-profit levels, and place orders more accurately.

Lastly, understanding how much each PIP or LOT is worth can help you manage your risk exposure better. You will better understand how much you stand to lose or gain in each trade.

What are the Risks associated with using PIPS and LOTS?

Of course, some risks are also associated with using these units of measurement. The main risk is that you may inadvertently over-leverage your position if you don’t correctly calculate the value of each PIP or LOT, which could lead to heavy losses in a short period.

Another risk is placing orders too close to the current market price, which could result in your order being filled at a less favourable price than you had hoped.

Note: Always do your homework and practice proper risk management techniques to avoid these risks.

When and how to use PIPS and LOTS successfully in FX trading

Now that we know what PIPS and LOTS are and the benefits and risks associated with using them let’s look at when and how to use them successfully in FX trading.

The first thing you need to do is choose a currency pair to trade. It is essential to select a team that is not too volatile so that you can more easily measure the changes in pips. Once you have chosen your pair, you must set your stop-loss and take-profit levels.

Your stop-loss level is the price at which you will exit your trade if the market moves against you. Your take-profit level is the price at which you will exit your trade if the market moves in your favour.

It is important to note that your stop-loss and take-profit levels need to be set in pips. To do this, you need to calculate the pips between the current market price and your desired level.

For example, let’s say the EUR/USD exchange rate is currently 1.2500, and you want to set a take-profit level at 1.2550, which means that your target is 50 pips away from the current market price.

Once you have set your stop-loss and take-profit levels, you can place your trade. If you are buying, you will enter your order at 1.2500; if you are selling, you will enter your order at 1.2550.

It is also important to remember that you need to calculate the value of each pip to determine your risk exposure. For example, let’s say you are trading one standard lot of EUR/USD, and your stop-loss is 50 pips away, meaning your potential loss is $500 (100,000 x 0.005).

Similarly, if your take-profit level is 100 pips away, your potential profit would be $1,000 (100,000 x 0.01).

Conclusion

Every novice FX trader should understand the concepts of PIPS and LOTS. They are essential in calculating gains or losses and setting stop-loss and take-profit levels. Understanding their worth and other basics of financial trading can help you better manage your risk exposure in each trade.