Glad you made it to the third installment of my article series. I made this article with the complete beginner in mind. If you’re already a seasoned pro then this probably sounds like elementary school math to your or something. Anyway, I left off in the last article explaining to you how currencies are traded in pairs, one against the other to gauge whether one was going to go up in value.
I told you that the US dollar is used as the focal point to help determine the value of all currencies, and I told you that the forex trading market is a 1.9 trillion dollar a day business with only a few foreign currencies dominating the market share to the tune of 85% daily. I am going to explain just how your money increases in value in this article and how your profit is measured to simplify forex trading for you even more. Please read on.
How profit units are determined
In forex trading there is something called a price interest point, the savvy term for this is a pip. When you are making pips you’re making a profit. For example; let’s say you want to trade the European euro against the American dollar. The exchange rate for the European euro for the US dollar may be something like 1.1789, if this goes up to say 1.1800 then the difference is about 11 pips. This means you have made about one hundred and ten dollars. In this case the pip value is fixed, but for the American market the pip value is not fixed, in this example one pip represented 10.00 of profit.
So now you see that a pip is just a fancy technical term used to explain what your profit is. Think of it as basic high school math. With the example I gave above of 1.1789 this would mean one and one thousand seven hundred and eighty nine ten thousandths. A one point move would look like this; 0.0001. Hope you’re not getting confused by all this jargon. My only purpose is to help you understand the basics the best way I can. Seeing as how this represents ten thousandths then you would probably have to buy a certain number of lots for whatever currency you wish to trade.
You can buy in lots of 100 or 200 or how ever many you wish so as long as you have the money to cover it. Depending on what kind of account you decide to open up you’ll be able to determine what amount will be needed. It may be a few hundred dollars or a few thousands dollars, there are different levels of investment for everyone, one for each comfort level.
I have explained to you what pips are and how they are used as a measuring tool to help determine profits when you’re trading the foreign exchange I have told you how to read and understand pip movements though this will be different between currency pairs, and I have also told you that you have to buy in certain lots in order to get in to a trade. In the last part of this article I will tell you how you can get in on this for next to nothing.