Pips and LOTS (Lots) are two metrics that are critical to effective forex trading. Understanding what these figures mean, how to use them, and how they relate to one another is essential for novice traders and seasoned veterans who want to expand their knowledge of the markets. This article aims to explain each term in detail, providing tips on market timing based upon these concepts.
Pips
The smallest unit of price movement most financial institutions recognise when quoting currency prices is a Pip. The value of a pip will vary depending on which currency pairs you are trading; however, the definition remains the same across all instruments. It means that you should always be able to find out exactly how many pips your trades have made or lost, even after the trade. The value of one pip will fall somewhere between 1/100th and 1/1000th of a single unit, depending on which currency you are trading.
LOTS
In the forex online market, the designation given to each contract is called Lots. When you buy or sell currencies, there is an agreement for how many units will be involved in the trade. People express this agreement in lots, with most major currency pairs using 100k or 200k contract sizes, but this can differ wildly depending on what instrument you want to use. For example, EUR/USD uses a lot of size of 100k, while USD/JPY uses 10k per lot.
If your account allows for micro-lots, some instruments will use as low as one lot per trade. These smaller sizes can give you a chance to jump into the market and take advantage of swings that might not happen on larger lots but remember. There is always risk associated with trading, so never increase your size beyond what you are comfortable with if the market begins to move against your position.
It becomes critical for forex traders to understand pips and lots in their trades.
News-based trades
There are always news events coming out that have an impact on currency values. Knowing how many pips or LOTS a trade will make or lose based upon the event release is essential to make the best possible trades. For example, let’s say that news comes out showing that China’s economy has been struggling, and this is sending ripples through Asian markets. The USD/CNY cross falls sharply on the news, as traders short the yuan due to concerns of slowing growth in China.
Naturally, you might assume that any significant currency related to China would fall, and so we see JPY and AUD move lower as well, both against the USD. It shows how news events can move the market and cause large swings, which you might be able to exploit.
Managing profit targets
Knowing how many pips or LOTS a trade can make or lose is not just about avoiding trading when you can’t use market volatility favour. It also comes into play when setting profit targets. Since there are 100k contracts in most major currency pairs, each pip movement is worth $10. It means that if a trade makes 30 pips, it has made around 300 dollars in profit. If the target were set for 50 pips but only reached 30 pips, then the trader would want to take some or all of their position off to lock in those profits.
The other side is essential as well. If trade should only make ten pips based on the entry and stop-loss levels, but they make 20 pips instead, then you should use a tight trailing stop to protect those profits from being taken by a reversal.
In summary
Pips and LOTS are units of measure that you should always know at a glance when trading. These units will allow you to place stops at given price levels to lock in profits, avoid taking risky news-based trades and help you properly manage your positions during moves on more significant currency pairs.
If you’re still uncomfortable with the concept of pips and lots, reach out to a reputable broker, like Saxo, for help.
