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By Lucrative
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PIPS
In this article we will cover some important Forex World Concepts. On the forex platform you can buy euros and sell dollars (as well as other currencies). In this case, you will see on the platform EUR/USD = 1.2137 (it is just an example, where the Euro is the base currency and the Dollar the quote currency). It means that you will be buying euros with your dollars at an exchange rate of $ 1.2137 (1 euro, in this case, is worth 1.2137 dollars). And what would these “$ 2137” be?
In forex scope, these “$ 2137” are known as pip’s. It is important to note that some currency pairs such as USD/JPY and EUR/JPY are quoted with only two decimal places, while pairs such as EUR/ USD and USD/CHF are quoted with four decimal places.
Therefore, the value of a pip depends on the pair. For a pair that has four decimal places, a pip is equivalent to 0.0001. For a pair that has two decimal places, a pip is equivalent to 0.01.
Pips are very useful because they allow you to quickly check the gains or losses obtained in a transaction. They are also useful for fixing, in advance, the number of pips to close a successful operation, or how many pips of variation the Stop Loss can be fixed on.
SPREADS
When you establish a position in forex, that is, start a trade by buying and/or selling a currency, there is a loss in trading. This is due to the fact that the purchase price (buy/ask) is higher than the sale price (sell/bid). In other words, the difference (spread) is the result of the difference between the purchase price and the sale price. So there will always be two prices for each pair: a buy price and a sell price.
MARGIN
The deposit margin is not an initial payment, as many think by margin in the financial markets. In the foreign exchange market the margin is more of a guarantee, a deposit in good faith to insure you against possible losses that may occur during the operations. The margin will allow you to take positions much larger than the amount available in your account (leverage).
In case the account losses reach a level below the required margin, the forex broker will close all open positions, exempting you from a negative balance (it’s called “negative balance protection”). If on the one hand it can be bad since all positions have been closed, on the other hand it is good because you do not owe the company, in the case of a highly volatile and fast market movement.
We then present the definition of some initial and important Forex World Concepts that we consider relevant for every forex investor (PIP’s, Spreads and Margin). We hope that we have helped you on this profitable journey that is guided by the Forex World.