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A pip is short form of ‘Point In Percentage’ and it is a smallest unit to measure change in a currency pair prices. The term used in forex trading represents a standardized unit of change in prices of currency pairs. This change can be measure in the terms of quote currency or underlying currency.
How It Is Calculated
For example we have 1.1050 price for EUR USD currency pair and price rises from 1.1050 to 1.1051 it means the change in price of EUR USD currency pair is 1 pip. It is the 1/100th change of 1%.
Mostly currency pair prices are offered in 4 decimal places and pip is the last number of price, means the fourth number of price is known as pip.
Generally this small change may affect traders’ profit and losses due to their high leverage. Some forex experts explain it as “A pip is a unit of measurement to represent the change in prices of a currency pair”.
What is Pipette
A pipette is also known as point or fractional pip which is generally considered equal to 10th of a pip.
Some forex brokers offer prices of currency pairs up to 5 decimal places for example we have currency pair of EUR USD with price of 1.10502 rather it is 1.1050. Now the fifth decimal number that is ‘2’ is known as pipette or a fractional pip.
It is very simple to locate a pipette or fifth decimal point on a trading terminal or mt4 terminal.
What is Lot Size
In financial market lot is the unit that we use to measure the amount of a base currency we sell or buy. There are three commonly used lot sizes in forex trading, Standard lot, mini lot, micro lot.
A standard lot is equal to 100,000 units of base currency. Mini lot is equal to 10,000 unit of base currency and it is 1/10th of a standard lot. On the other hand, the micro lot is equal to 1,000 units of a currency.
|Lot||Units of a currency|
Using standard lot if price changes 1 pip it means 10$ rate changes in price of currency. For example if you buy EUR USD at 1.1120 with one standard lot and price rises to 1.1121 it means your profit will be 10$ because price increased 1 pip.
Leverage is the borrowing amount of money that we can use for invest in any business and in forex trading leverage is the amount that traders are allowed to trade by the broker.
Leverage limit varies from broker to broker. By using leverage a trader can trade in forex market much bigger than their true capital.
For example if you have $1000 in your trading account and leverage is set to 1:100 ratio it means you can put trade that is equal to 100 time bigger of your invested amount. In this case you can put 1 standard lot for trade.
How to Choose Best Leverage
Choosing the best leverage depends on your trading style and strategy. If a trader trade for scalping he can choose high leverage while using long term trading strategy he can use low leverage to secure his trading account.
Best leverage for forex trading is 1:100. By using high leverage a trader can put his capital on risk.
Any forex broker you use for trading shows you two different prices for a currency pair i.e. ask price and bid price.
Ask price is the price of base currency at which you can buy it.
Bid price is the price of quote currency at which you can sell it.
Now the difference between these two prices is known as spread. And this spread is the way of earning for brokers. Forex brokers are service provider and they have to charge a fee for this service but instead of charging a fee they simply make their money from spread.
This is not the case for all forex brokers because some of the broker charge commission as well for trade.
What is Slippage
In forex trading slippage is an unpleasant situation. It occurs when an order is executed at the rate which is different from the rate set by the trader. Or when a hits a stop loss at the rate which is different from the rate set by forex trader.
Normally slippage occurs due to high volatility in forex market. High volatility is the result of several conditions including news events.
There are three type of slippage given below
- No Slippage
- Positive Slippage
- Negative Slippage
If the buy order is placed at the price which is requested by the trader the situation is known as ‘no slippage’ situation. For example a trader put a buy order at 1.1035 in EUR USD pair and it is placed at same price 1.1035 then this is ‘no slippage’ situation.
If the buy order is placed at lower price than the requested price the situation is known as positive slippage. For example a trader put a buy order at 1.1035 but due to high volatility in market it is placed at 1.1030 then this is positive slippage position and the trader will get higher profit than the expected one.
If the buy order is placed at higher price than the requested price the situation is known as negative slippage. For example a trader put a buy order at 1.1035 but due to high volatility in market it is placed at 1.1040 then this is negative slippage position and the trader will get low profit than the expected one.