In order to become more successful at online trading, one must possess the knowledge of particular terminology that is strictly related to the Forex market. The article below will bring up closer the definitions of such terms as leverages, margins, lots, pips, what do they mean and how to take advantage of those to become more aware of the market activity. Researching those will be particularly useful whenever dealing with the undergoing transactions and any closing events that might help at correlating the actual facts.
Lots & Pips
All the undergone sizes of trades and values of currency pairs are quoted by using pips and lots. Those terms are strictly related to the investing process and by knowing what such relevant elements are responsible for, brings you ever closer to be more successful at future trades. Pips are the smallest amount possible at which a currency transfer may occur, including the modern fractional pip numbers in the recently used quotes too. To makes things more clear, we can always use a practical example to which the term specifically relates.
If the value of EUR/USD currency pair rises up one pip, it means that it changes from 1.2345 to 1.2346 for instance, as the pip would be a single number on the forth place after the comma. By measuring the tendency of potential success or loss, pips can be used instead of the actual value of the proper currency. One can gain a single pip in a transaction of low or high number of currency involved, even if it would relate to a different amount of the actual value invested.
Lot on the other hand, is the smallest size being used within the currency trading business. The USD currency pair would come with a lot size equal to 100.000. Entering the trading process with a valid margin account would provide the option to buy or sell this currency for the minimum of 100K, even though the margin size can differ from one account to another. It still is a practical volume that one can apprehend when aiming to invest at one point or another.
Leverage and Margin
The same importance factor would go to the highly potential, even if coming at a risk, the conceptual factor of margin and leverage. Because of the slow movement of Forex prices on the market, currencies involved in the process of exchange may sometimes require some alternative techniques for making progress in terms of actual profit. Most of the traders would leverage the accounts in order to become more successful, whenever implementing an active process within the short term area of any transaction.
After registering a new Forex account, typical brokers would ask of you to make a defined amount of deposit, to prevent any losses from happening in the near future. This margin works as a prevention from suffering substantial loss, even if it can be only an insignificant one. With the help of the leverage, an investor is able to carry out much larger sums of money, than actually would be possible to obtain with a marginal sum, given the right course of action and any expenses involved in this. The trading lots available for investing are actually borrowed from the broker agency in charge, requiring the margin in exchange of the additional funds to trade. A leverage would be called the ratio in between the margin deposited and funds borrowed. Setting the leverage to an example of 100:1 would mean executing a trade worth 1.000.000 by investing only 10.000.
Many of the major or minor trades like the 50:1 or 20:1 are not being applicable for US investors. Understanding who this all works is required for a proper account management, as it may result in a substantial loss of value. Failing to do so, could lead to a margin call which occurs whenever the losses cannot be covered by the level of deposit amount available on the account. The higher the leverage stage used within a transaction leades to a higher risk involved with it in the process.