When it comes to the forex market, the actual sizes of the trades that are going on can actually be quite confusing. Not only is there a little bit of lingo that you need to learn, but you’re also going to be dealing with figures that you might be unfamiliar with.
To start familiarizing yourself with the sizes of trades within the forex market, the first type of figure that you need to be aware of is the exchange rate. Where you might be used to exchange rates that are only two decimal places long, i.e. 1.42, you’ll find that when it comes to forex, they are 4 decimal places long, i.e. 1.4267.
The smallest decimal place, i.e. $0.0001, is known as a pip or point. Both are really short for ‘Price Interest Points’.
So if you’ve heard people talking about how a currency increased by ’10 pips’, that just means that it increased by $0.0010. Of course, in the forex market a lot of the trades that go on are fairly large in size, and so for an investment of $100,000, a single pip’s worth of change is worth $10. Therefore an increase of 10 pips would be a profit of $100!
Mind you, this pip value that we’ve been discussing does vary from currency to currency. In the examples above, we’ve been talking about how it pertains to the US Dollar, but for other currencies it may differ depending on how the currency is traded.
Frankly, you’re not going to be able to remember the pip value for every world currency (unless you really are immensely experienced, or have an incredible memory). In all honesty, you really don’t have to though.
Knowing the lingo and appreciating forex trade sizes is useful, simply because it will allow you to wrap your head around the trades that are going on, and that you are undertaking for yourself.
For the common currencies, you may even find that as you familiarize yourself with the Forex market, you inevitably end up remembering their pip values.
On the other hand, for other currencies you could just look them up on an as-needed basis.
What you need to appreciate most though is that the pip value of various currencies will play a role in the ‘lots’ that you can purchase. For example, a currency pair with USD as the second currency (i.e. the one being traded into) always has a pip value of $10 per lot, or $1 per mini lot.
In essence, this means that you’d be trading in lots of $100,000 or $10,000.
Identifying rules such as that will help you to determine what you can invest and where you can invest it. After that, it’s all just a question of picking what you feel will be profitable, based on the options that you have available.