Forex For Beginners Blog

Like all true professions, FOEEX trading has its own terminology and one of the most confusing things is how money is managed in the market.

There are different types of trading platforms available; by far the most popular uses ‘Lots’ as a measurement of money. A lot is a ‘block’ of money that you trade with and the number of lots you deal with will depend upon the amount of money that you have.

Another way of trading FOREX is spread betting which is mostly relevant to the British as very few places allow it. Here you bet money on FOREX and the amount is determined by the number of pounds/dollars per point you are trading.

A point (also called a pip) is from the FOREX quotation for the currency pair you are dealing with. So for example, let’s say you are trading the EURUSD and the current quote is:

EUR 1.4334 to USD

In other words 1 EUR is worth 1.4334 USD.

Now a PIP (or point) is represented by the last digit (the one on the RHS) of the quotation. i.e.

1 EUR is worth 1.4334 USD

So let us say you are trading 10 UKP to the point, and then you will make or lose 10 UKP for every change in the value of that pip amount.

And that is how spread betting works.

The majority of us though will use the LOTS based system which is used in the US and the rest of the world. So what is a LOT?

A normal LOT is worth USD 100,000 which means under normal conditions you would need a USD 100,000 to trade. But, brokers are very generous; they use a concept of LEVERAGE whereby they are lending you money so that you can control USD 100,000 with a much smaller amount.

Now typically brokers give 100:1 leverage, which means that you would only need USD 1,000 to control USD 100,000 worth of trading.

Another way to look at it is that with a 100:1 leverage you will earn around USD 10 for every pip you made on a trade.

Of course if you make the wrong trade then you can lose USD 10 a pip as well. LEVERAGE can be dangerous if you do not manage your trades correctly and very very lucrative if you manage everything the right way.

Now you may not have enough money for a standard LOT account, but the good news is that there are also MINI and MICRO LOT accounts.

A MINI LOT is worth USD 10,000 and with the same leverage as before you will now make approximately USD 1 per pip.

Some of the brokers also trade with MICRO lots and these are worth USD 0.1 per pip or 10 cents.

Now the big benefit with this is that when you start trading, you can start with a very small amount of money to test the waters. In fact many brokers offer VIRTUAL MONEY to trade with. This is ‘PAPER’ trading in the best way because it’s electronic and you don’t use any of your money.

You can test out all your ideas, trades, money management, without wasting a cent.
Watch out for articles on money and risk management in the future.

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