What are Lots Traded and Pips in Forex Trading?

If you decided to enter the Forex market as a beginner trader, no doubt you will be confused by all of the new terminology. For example, what is a pip? Also, you are probably already aware that trading Forex can be risky. How can you limit your loss and best protect your trading capital? In this article we will briefly discuss how currency lots are traded to help you better understand how to plan your trading strategy and manage your funds.

In Forex trading, all earnings are expressed in "pips". Pip is short for Price Interest Point, also called points. Whereas the smallest denomination in USD is the penny ($.01), in Currency Exchange, funds can be traded in an even smaller denomination, $0.0001. This means that very small movements in currency prices can create large profits. So, a PIP is the smallest unit a currency can be traded in.

The actual value of a pip is not a set price. If you are trading with a standard account, a pip is worth $10. If you are trading a mini account, a pip is only worth $1.

The value of a pip changes based upon the size of your account, because the size of your account affects how much currency you can leverage. A standard full size trading account is 100,000 units of the base currency. If you are trading in USD, a standard account has a value of $100,000 USD. A mini lot is 10,000 units of base currency.

If you are trading mini lots, you can leverage $10,000. This is why a pip in a mini account is worth less than a pip in a standard full sized account. While Forex trading allows you to leverage more funds than you actually have, this can be a double edged sword. While you can make profits on funds that you leverage (rather than own), you can also have losses amplified as well.

There are several options to manage your risk when trading Forex. Firstly you must educate yourself to know when to enter and exit the market and what kind of currency market movements to anticipate.

You can also place a stop loss order. Stop-loss orders are the typical method which traders use to minimize risk when placing an entry order. In short a stop-loss order is utilized to exit your position if the currency price reaches a pre determined point.

If you are taking a long position, you would place the stop loss order below the current market price. For a short position, you would place a stop loss order above current market price. This trading technique allows you to manage your risk and, just as the name suggests, stop your losses at a certain point. As you can see, Forex trading can be complex, but once you understand the basic fundamental principals of how lots are traded, it will become clear to you.