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Pips and lot size are the most important basic principles of forex trading. There are everything in forex market. The profit, loss and risk management planning in forex trading, are tied to pips and lot size. Most traders have not taking their time to understand them very well, and that is the reason their risk management system is very poor. Majority of forex traders only know the unit of lot size, but they don’t know the monetary worth of lot size. Pips and lot size work in collectively.
The forex market is very liquid and highly volatile, with a trading volume of about 7 trillion US dollars per day. Most traders, both newbies and so called professionals get carried away with this high trading volume and jumped into trading without them having proper knowledge of how pips and lots size operate with the forex market.
Pips is the unit of measurement to express the change in value between two currencies and Lot size is the volume of an asset a trader use to execute an order. But, there are more to them, than their definitions. Now, we are going to look into their monetary values, so that we can have proper knowledge about them in order to help our risk management planning.
MONETERY WORTH OF LOT SIZE AND PIPS
If:
1 pip of Nano lot = $0.01
1 pip of Micro lot = $0.1
1 pip of Mini lot = $1 and
1 pip of Standard lot = $10
Therefore:
100 pips of Nano lot = $1
100 pips of Micro lot = $10
100 pips of Mini lot = $100 and
100 pips of Standard lot = $1,000
Now, you have gotten knowledge about it monetary worth, let’s see how they affect the forex market.
Due to the high trading volume per day, some major currency pairs for example GBPUSD can move over 250 pips on a highly volatile market.
If that is the case imagine a trader using 1 mini lot on $500 margin to execute a trade.
If his stop loss is 100 pips i.e his risk, then the trade goes against him, his loss is $100. Meaning 20% of his deposit gone. But remember, do not risk more than you can afford to lose. Forex expert always advice risk minimum of 2% on a single trade and maximum of 5% on the overall trades.
What about using 1 micro lot size to execute the same trade, his loss becomes $10. I.e 2% of his margin. Can’t you see 1 micro lot falls within the range of proper risk management system and 1 mini lot was out of proportion? Lot size and pips cannot be overemphasize in forex trading, there are the key to risk management system and brain box behind forex trading.
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