Home Market Research Understanding Lots, Pips, Spreads and Leverage in Gold Forex Trading

Understanding Lots, Pips, Spreads and Leverage in Gold Forex Trading

Understanding Lots, Pips, Spreads and Leverage in Gold Forex Trading

Gold Forex trading via the XAU/USD can be somewhat complicated once you get into the nuts and bolts of it. Earning a profit means learning the basic lingo of the market, including what lots, pips, spreads and leverage are.

What is a pip?

Basically, a pip is the smallest measure of movement that a currency can make on the Forex makret. For instance, if American currency moves from 1.0325 to 1.0326 during a trading session, then the currency is said to have moved one pip.

A pip can be compared to a tick or a point in stock market trading.

Depending on the currency that is being traded, a pip is worth different amounts. For instance, the euro is traded with four decimal places, so each euro pip is equal to 1/100 of a cent. This is not the case for the Japanese yen, however. The yen is only traded on the Forex with two decimal places, so the yen pip is actually equal to one cent.

Pips are the basic unit of movement that helped to define all of the other terms that will be used within this article, including lots, spreads and leverage.

Although it is good to know how much a pip is worth for the currencies that you will be trading, most of the time these values will be calculated for you by brokers who conduct your trades. Do not worry; these values are easily verified online, so you will never really have to worry about a broker attempting to make money off you by telling you the wrong pip value.

What is a lot?

A lot is a term that is based on the pip. Most of the time, a standard lot will equal 100,000 units of the traded currency. There is also a standard of trade movement known as the mini lot, which is equal to 10,000 of the traded currency. Both of these terms are used for different types of traders – market makers and institutional investors are usually dealing in standard lots while the average investor is usually dealing in many lots. Trades were made so often in these volumes that the standardized terms were coined in order to give people a shortcut when talking about certain levels of trading.

In short, traders buy pips in lots. The value of the pip is then multiplied by the number of units in the lot. For instance, if a trader makes a purchase of a standard lot of the USD/EUR with an exchange rate of 1.1234, then the value of the pip in that lot will be worth around $53.40.

What is a spread?

The spread in the Forex market is the difference between the buying and the asking price of a particular currency. The spread is how the broker makes his money on any trade. There will always be a spread on every currency, because market makers who determine the buying and asking prices will always leave themselves a bit of room for profit.

For instance, if the exchange rate of the USD/EUR is 1.1234, to use the values from the previous example, the buying price will be a little above this, say 1.1237. That 0.0003 is the profit that the broker will make off of any trade that is made on the Forex market on that currency. This means that no matter whether you profit or take a loss on trade, the broker will always get a profit off of you simply because you traded.

What is leverage?

Leverage in the Forex market is similar to leverage in all other banking in that investors only have to hold a certain percentage of an investment in cash. For instance, if the leverage that is allowed you by your broker is 100 to 1, then that means you only have to have one dollar in cash for every $100 that you trade on the Forex.

Having this leverage allows the average investor can trade in lots that are much bigger than here she would normally be able to trade. This is necessary to overcome the fixed costs of the spread and other transactional fees that are associated with trading on the Forex.

If you have leverage with the broker, then you are likely dealing in something called a “margin account.” Brokers tend to protect themselves by watching margin accounts and closing open positions if an investor takes too many losses. This keeps the actual cash in the account from getting too low and the investor being unable to pay back the leverage that he or she has taken from the financial institution. Investors with good credit will be able to get much higher leverage than investors with bad credit.

How to Trade Gold Online

The Price of gold is constantly on the move. Take advantage of the daily price changes in gold with an online trading account. Some brokers offer bonuses of up to 30% on your first deposit (Terms and conditions apply). Open Gold Trading Account Here

The broker trading platform will also provide you with numerous charting tools and the ability to trade other commodities and currencies in addition to gold CFD’s. You might also want to begin trading with a demo account before attempting to risk any of your own money. That way you can practice trading with virtual money on the demo platform first.

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