Knowing and understanding the proper terminology within the forex market is essential in becoming a successful trader. In this article we define what pips, lots, margin and leverage are.
Pips and Lots
Currency traders quote the value of a currency pair, and trade sizes, in pips and lots. A pip is usually the smallest amount by which the value of a currency pair can change, although these days some brokers offer fractional pip quotes too.An important guideline for the beginning trader is to measure success or loss in an account by pips instead of the actual dollar value. A one pip gain in a $10 account, is equal, in terms of the trader’s skill, to a 1 pip gain in a $1,000 account, although the actual dollar amount is very different.
Margin and Leverage
Another important concept in currency trading is the twin phenomenon of margin and leverage. Since forex prices move very slowly (in terms of the actual change in value), the vast majority of traders leverage their accounts to create meaningful returns in short term trading. In the absence of leverage, it is difficult to generate even a ten percent return in the forex market, which is not the kind of profit that most forex traders have in mind when beginning their careers.When you open a forex account, the broker will request that you deposit a small sum, known as margin, as insurance against the losses that your account may suffer.