What is a Pip?
"Pip" stands for "percentage in point" or "price interest point." It's the smallest unit of price movement in a currency pair. For most currency pairs, a pip is the fourth decimal place.
Example: If the EUR/USD pair moves from 1.1234 to 1.1235, that's a one-pip movement.
However, for Japanese Yen (JPY) pairs, a pip is usually the second decimal place.
Example: If USD/JPY moves from 109.45 to 109.46, that's also a one-pip movement.
Pips are how traders measure their profits or losses.
What is a Lot?
A "lot" is a unit of measurement for the amount of currency you are trading. Think of it like buying eggs; you usually buy them by the dozen, not individually. In trading, you buy currency in "lots."
There are different sizes of lots:
- Standard Lot: 100,000 units of the base currency.
- Mini Lot: 10,000 units of the base currency.
- Micro Lot: 1,000 units of the base currency.
Nano Lot: 100 units of the base currency (less common).
The size of your lot directly impacts the value of each pip. For example, with a standard lot in a currency pair like EUR/USD, a one-pip movement is typically worth $10. With a mini lot, it's $1, and with a micro lot, it's $0.10.
Choosing the right lot size is crucial for managing your risk. Beginners often start with micro or mini lots to limit potential losses.
What is a Spread?
The "spread" is the difference between the bid price and the ask price of a currency pair.
- Bid Price: This is the price at which you can sell the base currency.
- Ask Price (or Offer Price): This is the price at which you can buy the base currency.
When you enter a trade, you immediately pay the spread, which is how brokers make money. The wider the spread, the more it costs you to enter a trade. Spreads can vary depending on the currency pair, the time of day, and market volatility. Popular currency pairs (majors) usually have tighter (smaller) spreads.
Example: If EUR/USD has a bid price of 1.1230 and an ask price of 1.1232, the spread is 2 pips.