What is pip, pippette, lot, spread

Base and quote Currency

Forex Trading is about trading currencies in pairs. A pair is containing 2 currencies.

The most famous currency pair in forex trading is EUR/USD.

This instrument is provided for trading by all forex brokers.

In this Pair EUR comes first. This is the base currency of the pair.

US Dollar Comes Second. It is the quote currency.

The USD (US Dollar -$):

Pip:

It is named as 1 basis point that is the smallest fraction after the decimal. If we compare 1 cent of a dollar and a pip in Forex the former can be written as 1/100 and the later as 1/10,000. One pip of 1.2457 will be 1.2458 and if we neglect one pip then it will be 1.2357. The pip is frequently used by many platforms as it is the smallest fraction and can measure the smallest one as well.

Pip is the fundamental unit of measure in Forex trading which is commonly $0.0001 for U.S dollar. This fundamental unit prevents the Forex trader from a huge loss in their investment.

For example, if the value of pip would be high, it will bring a great change in currency values.

 

Pipette:

Pip is frequently used because of its smallest fraction but for the correct and certainty, the trader’s fraction of one pip which is named as pipettes. Pipettes are very small value than pip and it is equal to one-tenth of a pip and it normally shows 1/100,000.

Take the example of EUR/USD if it values 1.25548 and if we add 2 pipettes the value will become 1.25550. The fifth digit place represents a pipette. The value of pipette depends on the size of the lot in dollars or Euro that a trader opens.

We can take an example, if someone buys a lot of $100,000 in a EUR/USD pair then the pipette will move to $1 and if it is $10,000 lots then the pipette will be 10 cents.

 

Lot:

A unit that is used in the Forex market for the measurement of the standard size of a transaction in regards to the base currency. We use hundred thousand units of lots for the base currency. A lot will be 100,000 euro in a pair of EUR/USD.

A mini lot is equivalent to One-Tenth of the standard Lot. A micro lot is equivalent to one-hundredth of the standard lot. Come to the broker they are even smaller than micro lots. These are not standardized and can change from one broker to another broker.

It is a trading term used in Forex for the size of the trading position. 100,000 units are the standard size. The other sizes are measured against this standard size in Forex trade. This is referred to as one standard.

 

Spread:

The difference between ASK and BID is called spread. Now you might think what is BID or ASK.. A BID is exchange rate, which is used for the customer willing to buy a quite currency. This is the highest price while ASK is the lowest price that a currency pair offer. The exact price of quote currency selling is called ASK.

We express the spread in pips.

The other term which is important to know is fixed spread…

It is the difference between ASK and BID which is kept balanced which is not change the market condition.

The other term is variable spread: it changes with the market conditions. When the market is inactive, the spread is low at that time which can be 1-2 pips and when the market becomes active it becomes widen up to 40-50 pips.

 


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