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5 Basic Things All Novice Forex Traders Should Know
1) Percentage In Point (PIP)
5) Currency Pairs
When I began trading I had to learn many new terminology that I had never previously heard of and broaden my vocabulary. There were times when I had to quickly google what a word meant when I was on the phone with a broker to not seem to uneducated about Forex trading. It took me a while to be able to fully understand what I was actually being asked, it’s a lot easier for you now as you have access to the everything trading glossary that you can use to understand ALL the Forex keywords. It’s important to understand the terminology in Forex to be able to communicate clearly with your broker, platform and wider community.
PIP (Percentage In Point)
A ‘Percentage in Point’ (PIP), also known as ‘Point’ is the change of the 4th decimal point in the price of a currency pair (below). So, for example, if the price changes from EUR:USD 1:1231 to 1:1234 then it has increased by 3 PIPs. If the price changes from 1:1231 to 1:1222 then it has decreased by 9 PIPs. The only exception to this is the Japenese Yen (JPY), as this currency’s value is shown only to 2 decimal points. Find out more about PIPs in detail here.
The leverage is the amount you can (in essence) multiply the odds of your equity, normally borrowing this ‘leverage’ from your broker. This means that if it is 1:100, you can multiply your equity (say £1000) to £1000 x 100 = £100 000.
This can be a very lucrative tool and a great benefit of trading on the Forex market. However, there is much greater risk involved – and it is possible that you can ‘over-leverage’. Find out more about leveraging here and the risks involved with higher leverages.
A margin is a deposit in order to access features in your account such as the leverage. Different brokers ask for different margin values. If you want to use £1000 to leverage a 100:1 account, the broker may ask for a 100% leverage to make sure your account does not go ‘negative’, it is also used for an insurance for sudden movements in the market.
The spread is the difference between the ‘bid’ and ‘sell’ price. This is where you broker and their liquidity provider can earn money. It is important to find a broker with a fair spread for what you want to do – the spread is represented by a standard amount of PIPs but may fluctuate due to market volatility. Some brokers offer a ‘real-spread’ which is what they receive from their liquidity providers, but then you will have to pay comission on your trades (a lucrative scheme for scalpers).
A currency pair is the price ratio of one currency relative to another. An example of this is when you go and change your pounds for euros at a money exchange. You will get x amount of euros for your pounds represented in a ratio.