/Understanding PIPS and LOTS in forex trading

Understanding PIPS and LOTS in forex trading

When trading forex, it is instrumental that you understand the concept of PIPS and LOTS. These terms are essential to making successful trades and avoiding costly mistakes.

A PIP is the most minute unit of price movement in the market. A PIP is equal to 0.0001 (one-hundredth of a per cent). For example, if the EUR/USD moves from 1.2350 to 1.2351, that would be considered one PIP of movement.

A LOT measures how much currency you are buying or selling. There are three main types of lots: standard, mini, and micro.

A standard lot is parallel 100,000 units of currency. A mini lot is parallel with 10,000 units of currency, and a micro lot is 1,000 units.

When you trade forex, you will typically see prices quoted in terms of PIPs. For example, if the EUR/USD is trading at 1.2350, one euro is worth £1.2350 US dollars. If the price moves to 1.2351, that would be considered one PIP of movement.

How to determine the size of your LOT

Determine the size of your account

The first step in determining the size of your LOT is to calculate the value of your account by multiplying the total cash in your account by the leverage ratio. For example, if you have £10,000 in your account and use 50:1 leverage, your account is worth £500,000.

Determine the risk per trade

You will need to decide the amount of risk you are prepared to take per trade. It will depend on your risk tolerance and the size of your stop-loss order. For example, if you have a £500,000 account and are willing to risk 2% per trade, you can lose up to £10,000 per trade.

Determine the size of your LOT

Once you know the value of your account and the amount of risk you are willing to take, you can calculate the size of your LOT. For example, if you have a £500,000 account and are willing to risk 2% per trade, you can lose up to £10,000 per trade. To determine the size of your lot, divide the value of your account by the amount of risk you are willing to take. In this case, it would be £500,000/£10,000 = 50 micro-lots.

How to use PIPs to your advantage in forex trading

Use PIPs to set your stop-loss and take-profit orders

Setting your stop-loss and take-profit orders are among the most vital things you can do when trading forex. A stop-loss order will close your trade if the price moves against you by a certain amount. A take-profit order is an order that will close your trade if the price moves in your favour by a certain amount.

When setting your stop-loss and take-profit orders, it is vital to use PIPs. For example, if you buy EUR/USD and the price is 1.2350, you might set your stop-loss at 1.2340 (10 PIPs below your entry price) and your take-profit at 1.2370 (20 PIPs above your entry price).

Use PIPs to calculate your potential profit or loss

Another way to use PIPs is to calculate your potential profit or loss. For instance, if you buy EUR/USD at 1.2350 and the price moves to 1.2370, that is a 20 PIP move in your favour. If you are trading one standard lot, that would be a £200 profit (20 PIPs x £10 per PIP).

You can also use PIPs to calculate your potential loss. For instance, if you buy EUR/USD at 1.2350 and the price moves to 1.2340, that is a 10 PIP move against you. If you are trading one standard lot, a £100 loss (10 PIPs x £10 per PIP).

Use PIPs to scale in and out of trades

Scaling in and out of trades is a strategy that some traders use to try and maximise their profits. When scaling in, a trader will enter a trade with a small position and then add to their position as the price moves in their favour. When scaling out, a trader will exit part of their position as the price moves in their favour and keep the rest of their position open if the price continues to move in their favour.

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