What is Pip, Spread, Leverage and Lot in Forex?
When you are learning a business, probably the first step is to understand it’s terms and phrases. With that in mind let’s get to know what is pip, spread, leverage and lot in forex.
What is Pip in Forex?
Pip is the Price Interest Point and the smallest unit of price fluctuation in the exchange rate. Since the pairs of currencies are quoted to 4 decimal places, a pip is equal to 0.0001. Some brokers currently have fractional pips that add a digit for more accuracy to some pairs of currencies, and thus they are quoted at five decimal places. A pipet is called a pipette fraction.
Forex traders often use the pip to show profit or loss. For example, when a trader receives 40 pipes in a 40-pile deal, he’s taken advantage of 40 pips. The amount of cash earned depends on the value of the pips. The monetary value of each pip is influenced by three factors: the currency pair being traded, the transaction value and the exchange rate.
What is Spread?
Spread is the difference between the bid rate (ask) and the sale (bid) that is measured by the pip. Spread is the only cost you pay as a trader to enter into a Forex deal.
In general, smaller spreads are more suitable for traders, as traders benefit more from the smaller fluctuations in exchange rates.
Just as you guessed correctly, brokers’ income is due to spread spreads.
What is leverage?
Leverage is the ability to control one big thing by a small thing; in other words, you can control a much greater amount of money in your account with a small amount of money, and this is only for Forex transactions.
The standard value of a leverage offered in a Forex account is 100: 1, which means you can trade for $ 1 at $ 100. So, with a $ 1,000 deposit you can trade at $ 100,000.
Using a leverage, you can only earn a significant amount of money with a small investment or lose a significant amount of your money, which depends on how you use leverage and risk management.
What is Lot?
Lots represent the amount of your transaction. The amount of lots directly affects the risk of your transaction.
The smallest amount in a Micro Lot transaction is 1000 units in a transaction; the microloop in most pairs of currencies is $ 0.10 per pill. This is a huge deal for traders with little capital.
The Mini Lot is 10,000 units per transaction, which is equivalent to $ 1 per pound in most major currency pairs.
The standard lot in a transaction equals 100,000 units, which in most pairs of currencies is equivalent to $ 10 per pile.