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How Forex Works and What are Pips and Lot in Forex?

How Forex Works and What are Pips and Lot in Forex?

how forex worksForex is a currency exchange market place, people here either sell or buy currencies from different countries. There is no complexity in it like other trading markets as at FX you exchange one currency with another one, by keeping a check on recent trends. As simple as that, this platform offers everyone to come and trade with a tiny amount as low as 25 USD. When a trader makes a currency quote like USD/EUR, where the base currency is USD, and EUR is the quoted one, he believes that the value of EUR will increase as compared to USD. By keeping a traded amount at FX, he will earn a profit by selling them later.

Here, all money making depends upon the exchange rate which is merely the ratio of one currency to another. One either buy or sell the base currency and it goes like, the base currency is the one which should get high as compared to the quoted one, so that one can make money. An example to state that – Mr. X bought 10000 Euros (EUR/USD) at an exchange rate of 1.1800, later after three weeks you sell your euros to repurchase USD, and now, the exchange rate has become 1.2500. This changed exchange rate has earned you 700 USD as your profit. EUR 10000 X 1.18 = 11800 USD (When you bought currency pair) EUR 10000 X 1.25 = 12500 USD (When you sold your currency pair with updated exchange rate) You earned a profit on your base currency, i.e., USD, you invested 11800 USD (by exchanging them for euro), and you got 12500 USD, 12500-11800 = 700USD.

Buying and Selling Currency Pairs: What You Should Know

Before proceeding to the buying and selling currency pairs, you should know what a currency pair is. A currency pair consists of two different national currencies from two countries which are brought together to trade in the forex (FX) market. The first currency on the list is the base currency whereas the second one as the quote currency.

The selection of the two currencies which a trader wants to be in the currency pair depends on their exchange rates. Similarly, the health of a country’s economy dictates the demand and supply of the currency of a country.

Traders must analyze the economic situation of the country whose currency is present as the base currency and take decision accordingly, whether to buy or sell. There are some key indicators which can help you to estimate the economic condition of a country. They are its GDP rate, interest rates, unemployment, etc. which influence the exchange rates to a large extent.

Let’s understand this with an example. A trader can trade with EUR/USD (Euro is the base currency). He can also assume that the value of USD will depreciate more against EUR based on the latest stats from the US. In this case, he will buy more EUR as his instinct will tell him doing so will deliver him more profits. And if USD appreciates against EUR, then this trader will sell them before it’s too late. So the economic analysis and prediction based on it are the major factors which help in deciding the time of buying and to selling currency pairs.

What are Pips in Forex?

Time to study some mathematics, don’t worry it is not as hard as algebra but needs serious attention and concentration; it is advised to not jump in trading before knowing this. Pips in Forex is the measurement unit which is used to determine the change in values of two currencies when compared together. Other names like Pipettes or Lots also know for this trading unit. Pips in Forex are used to calculate the movement or value of currency whether trades are rising or shattering. Usually, a pip is the last digit of the price quote; a pair is compared up to the last four digits.

At FX which is a vast and giant trading market, even 1/10th value of a pip matters a lot and gets considered as pipettes. Pips are calculated as per the currency it gets used for. Every currency carries its respective value based on which the calculation of the pip takes place. The values next to the two highest numbers in the traded value can determine pipettes. After all this brief introduction, one important question which you will be thinking to ask is how to find the pip value in my account (if trading on FX), answering this question, the first thing which one has to do is to convert the given traded value in their base currency. After that multiply or divide the given pip value by the exchange rate of your quote. If found pip value and traded currencies are the same then there is nothing much to do.

What is a Lot in Forex?

Forex is the biggest market place with daily transactions worth trillion dollars. It is the platform where traders buy and sell all kind of currency pairs and earn their profits or losses depending on the value of their base currencies’ exchange rates against their counter currencies. In the early day of trading, Investors traded Spot Forex with a fixed number of currency units which a trader could use for buying or selling. These fixed amounts were known as lots. Initially, a lot was always 100,000 units of currency (standard), but with time, forex has introduced some other lots like a mini lot (10,000 units), a micro-lot (1,000 units), and a nano lot (100 units). The lots are further sorted to the lowest degree of currency known as ‘pips’. A pip represents the change in the value of a currency relative to another currency as a percentage. These pip (percentage in point) values are calculated to conclude whether a trader is in profit or is in the loss. Forex brokers use either these lots or the actual currency units to measure the trading quantity. Nowadays, forex brokers consider pip values for selling and buying currency units. Earlier, profits and losses have a calculation on the basis of lots when there was a minimum limit to the trading quantity at Forex. However, the scenario has changed with the spread of internet availability in every corner of the world paving for all the trading enthusiasts to try their hand at trading irrespective of the trading amount which can be as low as 25 USD.

Impress Your Date with Forex Lingo

You are all set to go on your first date with Forex (FX) that you have been longing for a while. Well, before heading towards the date, it is imperative for you to know the Forex lingo. By now, you may have come across or rather well-versed with the Forex Lingo terminology but revisiting those terms will definitely equip you better for your date. Major-Minor Currency – Forex being a currency exchange marketplace, allows all kind of currencies but the most traded ones which rule this market place are USD, JPY, CHF, EUR, GBP, AUD, CAD, and NZD. However, these eight currencies are known as the major currencies and the remaining are minor currencies.

Currency Pair – To trade on FX, the trader has to choose a pair of currencies to trade with. This pair is the quotation of the relative value of the first currency unit against the second currency unit.
Base currency and Quote currency – Base currency is the first currency in any currency pair with which a trader trades primarily whereas quote currency is the second one on which a trader plays his bet. Exchange rate – This is the value of a currency of a country in relation to the value of another country’s currency. In simple terms, we can say that as the rate at which a currency can be exchanged for another currency. Pip – Pip or percentage in point represents the value of change in a currency pair’s exchange rate. Pipette – It is the 1/10th part of a pip. Pipettes are available to get more accurate fractions. Quote Convention – This is a format with which exchange rates are expressed like Base Currency/Quote Currency = Bid/Ask.

Know Forex Order Types

Know Forex Order TypesThe way by which one enters or exits a trade is termed as ‘order’. A variety of Forex Order Types exist on the Forex market; however, all the brokers do not cater to all kinds of orders. A broker may accept only some types of orders from the customers. Let’s get an insight into these Forex Order Types.

Market Order – This order allows a trader to deal (buy or sell) at the best available price at Forex. Sometimes, due to the volatile nature of the forex market, the final executed price may differ from the trader’s selected price.

Limit Entry Order – This order allows a trader to sell at a certain price which is above the market price or buy at a particular price which is below the market price.

Stop Entry Order – This is a vice-versa of above-stated order type. This type of order facilitates the trader to buy at a specific price which is above the market price or to sell at a specific price which is below the market price.

Stop Loss Order – This order linked to a trade acts as a shield to protect the trader from incurring additional losses when the exchange rates move in an unfavorable direction. In a long position, it’s called sell STOP and in the short run position, it becomes buy STOP.

Trailing Stop Order – This is similar to stop loss, the only difference being it moves when the market prices swing.

Weird Forex Order – Few traders like to place unrealistic and taboo sort of orders, often considered as Weird FX Orders.

A few other orders go with these names – One-Triggers-The-Other Order, One- Cancels-The-Other, Good for the day, Good’ Till canceled. These are rarely placed orders as most of the FX trade happens with the above 5 orders.

Forex: Demo Trade Your Way to Success

Demo trading platforms can be compared to the support wheels attached to a bicycle which enable the kids to learn and eventually gain confidence in the process of riding a bicycle. The support wheels are let go once the kids had enough practice and learned the basics of cycling. Similarly, new traders can utilize the various demo trading platforms to learn forex trading’s mechanics and test their trading skills until they gain the confidence to put real money in the market. The demo accounts are replicas of real trading accounts which allow the aspiring traders to trade but with zero risks and zero money involved.

It’s crucial for a serious individual who to trade on forex to spend a good amount of time to learn and understand the patterns, terminology, pros-cons and rhythm of the Forex market. Demo accounts help in getting the feel of the real- time action and learn how market rates can take sudden u-turns plunging from sky high to rock bottom. By providing you with free demo trading accounts, the forex brokers increase your interest and get you for serious so that you can eventually start trading with real cash. Ideally, a person should spend around three to twelve months on these accounts to reach a stage where profits are consistent. As a novice trader, you should focus on one currency pair and should stick to it till you learn all the trading aspects. Once you find that you are confident and studied enough, then you can start real trading with small amounts in the beginning.

Forex Trading is NOT a Get-Rich-Quick Scheme

Want to earn quick bucks and hence decided to board the forex trading bandwagon. Halt! Though it’s a fact that it can make people rich overnight, bear in mind, it can make them paupers too at the same pace.

Before venturing into the forex trading arena, the traders should realize that it’s not a get-rich-quick scheme. It’s a risk-filled business for traders and without mincing any words, it can be said 90% of the traders lose their investment for the lack of planning and training. Even the most successful traders lose their money on some of the trades. People who are unemployed and have no reliable source of income or have piled up credit card bills or have very low income should refrain from forex trading as their financial conditions may worsen if luck doesn’t favor them.

You have interest in forex trading, but if it is not backed by any trading skills which take considerable time to learn, then it’s time you pull your socks up and learn all the ins and outs of the forex trading by investing your hard work, diligence, and deliberate practice.

 

Forex market is such a volatile market place that it can bring unprecedented losses to even veteran traders. Hence it is always better to have a backup source of income in case you experience losses in the market. Skilled and experienced forex traders do make money through their trades, but they haven’t achieved this success overnight. Years of practice, patience and market study made them what they are now.

8 Comments

  1. Anish Niraula 1 on August 16, 2019 at 2:54 AM

    very usefu

  2. 11700706 on August 24, 2019 at 10:47 AM

    Got it

  3. Vinkal on November 26, 2019 at 4:55 AM

    Good information

  4. Samudra on January 12, 2020 at 5:23 AM

    good.

  5. Ranjeeta on January 21, 2020 at 5:21 AM

    It’s very informative.

  6. Dev Ashish Shrestha on August 8, 2020 at 8:42 AM

    The information above about the techniques to make money through Forex is helpful for short-term and long-term investments.

  7. 11800287 on August 8, 2020 at 11:54 PM

    wow I love it.

  8. Subash Banjara on August 18, 2020 at 5:09 AM

    very useful information.

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