Forex Pips and Forex Leverage
I think you have done with first lesson. If so this is the time to head into the next lesson. I named it as More than introduction, because it is a part of introduction but it is bit advanced than an introduction. Here I am going to discuss about Pips and Leverage.
What are PIPS
A "pip" is the smallest unit of a any currency pair. Because of this, that is the smallest currency value can be moved up or down in Forex market. Just see an example. Eg: In GBP/USD currency pair, an increment from 1.2675 to 1.2676 is a 1 pip. That mean if the value moves by 0.0001 is known as a movement of one Pip. But there are exceptions like USD/JPY, changing of it's value is considered only up to second decimal point. So movement of 0.01 is known as one pip in USD/JPY.
Lets see what is the important of a Pip. The profit is calculated by amount of pips you have earned during a one trade. To calculate these we need to know "Pip Value". Pip value means the value of a pip. But there is no need to learn this, because your broker will do it for you. So if you cannot understand this equations just forget it. Anyway I'll tell a bit about those.
Pip value = 0.0001/exchanged rate
If the exchange rate of USD/CHF is 1.2525 the,
Pip value = 0.0001/1.2525
= 0.00007984
Just imagine you have got 100,000 lots (amount of units you have bought using whatever the money that you invest). If so your profit will be calculated as follows,
Here I imagine the value of USD/CHF increases from 1.2525 to 1.2545, that means it moves by 20 pips.
Profit = Pip value x lot size x amount of pips you gained during particular trade
= 0.00007984 x 100,000 x 20
= 359.68 $
Yes that is good enough isn't it? But now you may think how should I buy 100,000 lots. It is huge. I don't have enough money to buy that much. No you don't want to worry. Your broker will provide you the solution. They will provide you a facility called "Leverage". Let's see what the hack is that.
What is Leverage
Close your eyes a bit and take a deep breath and recall what have you learned so far. If you can recall them, it shows you learnt it well. If not go back and recap it. Let me discuss the "Leverage".
Close your eyes a bit and take a deep breath and recall what have you learned so far. If you can recall them, it shows you learnt it well. If not go back and recap it. Let me discuss the "Leverage".
As I earlier said it facilitate you to buy a huge amount of lots (units of currency pairs) by investing little amount of money. How it works? There are several Leverage levels such as x100, x200, x400. I am not going complicate you by showing more and more calculations. Just remember once you invest some money on a trade they will put some additional money on your trade to support you. If you select Leverage of x100, then they will add 100 times than your investment to support you by buying more lots (units). Isn't it good? Yes it is good, but if you use higher leverage, it is easy to lost your all money. Here I am not going to tell why it risks your money, just believe me, don't trade in higher leverages until you get profits from 98% of your trades. I recommend x50 and x100 for the beginners.
One thing to say, the leverages vary from broker to broker. As an example eToro allow us to trade with x25, x50, x100, x200, x400 leverages.
What is profit
Most of beginners asked me how much I can earn per day from Forex trading? My answer is what amount can you spend on Forex? That simply mean you can earn any amount that you need. But you need to be careful not to lot your money. For that you need to learn Forex trading from A to Z. The other factors affects on the profit are;
1. The leverage you use
2. The number of pips you earn
One thing to say, the leverages vary from broker to broker. As an example eToro allow us to trade with x25, x50, x100, x200, x400 leverages.
What is profit
Most of beginners asked me how much I can earn per day from Forex trading? My answer is what amount can you spend on Forex? That simply mean you can earn any amount that you need. But you need to be careful not to lot your money. For that you need to learn Forex trading from A to Z. The other factors affects on the profit are;
1. The leverage you use
2. The number of pips you earn
3. The number of profitable trades you can make per day
Thats enough for today. We will go deep in to Forex trading in future lessons. I'll hope your participation for my future lessons.