In Forex trading the bottom line is profits and profits are counted in PIPs. When you enter a trade in the Forex or FX market you are trading on what is called a currency pair (or pairs for short). These pairs are nothing more than the relationship between two separate currencies. For instance if you are looking at the Euro (EUR/USD) you are watching the exchange rate between the Euro and the US dollar.
The currency exchange rate is always one number with decimal places and they are expressed in measures of ten-thousandths of a unit and this ten-thousandth is called a “pip. "
So in our Euro trading example above if the pair was quoted at 1.4525 then it means that it takes $1.4525 to purchase a single Euro at the currently quoted exchange rate. Or said another way you pay one buck and 45.25 cents for each Euro.
When it comes to making a profit from the Forex markets you have to have an increase in price from the time you purchased to the time you sold your specific currency pair. So from our example if you purchased at 1.4525 and the pair increased to 1.4530 you would have an increase of 5 pips. This would be a relatively minor shift as a move of 20 or more pips is not that uncommon.
The question burning on your mind is probably how much does that change my bank account? Well that has to do with the lot size of the currency you are trading. But lets say that you were trading on a lot size of 10,000 so you are controlling 10,000 USD and the current exchange rate were a nice round 1.50 so for each shift of a pip you would gain or lose $1.50
Now don't let the $10,000 figure scare you because most Forex brokers only require a small deposit on the total lot size. This means that you are using financial leverage to your advantage. So instead of making a measly $10 on 10,000 risk you are only asked to put up say $50 or $100 deposit on each Fx trade. This means that your return on investment (ROI) is considerably higher, however it also means that when losses come they affect you with equally severe rates. So use margins wisely.
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