Pip

Forex Mini Account Trading

Forex mini accounts are ideal for just about anybody who is starting out in forex trading. You would have to be very rich or very confident to start right out with a standard account if you are a retail trader (i.e. somebody trading on their own account from home). A mini account lets you get started without risking so much money and this makes it a very attractive option for most people.

Mini forex trading accounts generally allow you to trade with just one tenth of the normal lot size. This usually means 10,000 units of currency instead of 100,000.

Of course you do not have to have this much in your account. Currency trading works with leverage. If you are using 100 times leverage then you need $100 to control $10,000 in your mini account or $1,000 to control $100,000 for a standard account.

$100 or 100 units of other currency per trade is enough for most people to commit to a trade when they are starting out and that is why the mini trading account is so attractive.

The pip size is also usually smaller in a mini account. Pips are units in which you will measure your profits, losses and costs (the spread). Their dollar value can vary depending on the currency pair that you are trading, the lot size and other conventions of your broker, but a common standard pip size is $10 and mini pip size is $1.

Some brokers are now quoting prices to 5 decimal places which technically would make one pip 0.00001 of the quoted price, but we will continue to use the standard 4 decimal place pip for this example.

So if you have a standard forex account you can expect to put up $1,000 on each trade, be involved in trading lots of $100,000 and measure your profits in $10 units.

If you have a forex mini account you can expect to commit $100 on each trade, be involved in trading lots of $10,000 and measure your profits in $1 units.

Of course you can set stop losses so that you do not have to risk all of the money that is committed to the trade. But your losses will be measured in terms of pips so these too will be 10 times greater in the standard account.

If you are successful and your fund grows, you may want to move up to trading greater sums. You can still do this in your mini account by trading more than one lot at a time. So if you want to trade a standard lot size you would just trade 10 mini lots. This has the advantage of still giving you the ability for fine control of your stops because your pip size is still just $1.

The standard account used to be all that was available before so many people had powerful home computers and high speed internet connections that made it possible for the ordinary person to trade from home. The forex mini account is a development that has opened up the market to people who have the technology but not the money for standard currency trading investment.

If you want to risk even less of your money, you could look at forex micro accounts which allow you to make even smaller trades. Be aware though that the spread is often a little high and you might find it difficult to profit with a micro account. It may be better to use a demo account until your confidence builds and then open a forex mini account for real trading.

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Sunday, June 21st, 2009 Strategy No Comments

What Is A Forex Pip?

When you start to look around forex websites online, you will soon see references to the forex pip. Your gains and losses will be measured in pips. Something else that is measured in pips is the spread, the difference between the bid and ask prices which is the main cost of forex trading and how the brokers make their money. So it is clearly very important to understand what is a forex pip.

The word is an acronym standing for percentage in point (or sometimes, price interest point). It is the smallest increment of changes in values. It allows us to measure a rise or fall in currency values in percentage terms instead of in dollars and cents.

Why do we need to talk in pips? The reason for this is simple. In the foreign exchange market there is no world currency in which to express values. The US dollar may be the most commonly traded currency but it is not involved in all trades. If you are trading cross rates, i.e. two other currencies such as EUR/GBP or any other combination that does not involve USD, it would not make any sense at all to express your gains and losses in terms of US dollars. Instead, we need something that is a small percentage of the value of whatever currencies we are dealing with.

This means that the monetary value of a pip varies according to the currency.

Most currencies are quoted to four decimal points. For example you might see the bid price for EUR/USD quoted at 1.3642 and ask price 1.3644. The difference (the spread) is 0.0002 or 2 pips. Here a pip is 0.01% of a lot.

So if the lot size was $100,000, one pip would be worth $10. For a lot size of $10,000, one pip would be $1.

That is the value of pips when the US dollar is the quote currency, i.e. XXX/USD. But when the quote currency is different, one pip is usually 10 units of that currency (e.g. 10 euros or 10 pounds). Or if your lot size is 10,000 units, one pip is 1 unit (1 euro or 1 pound).

The exception is the Japanese yen which has a much lower unit value than most currencies (you get a lot of yen to the dollar). Because of this, the yen is only quoted to the second decimal point. You might see a price USD/JPY 110.15. In this case one pip is 0.01 or 1% but in yen, not dollars. So the pip value is JPY 1000 which at that price would be worth US $11.015.

These differences can be confusing when you are just starting out. So it is better for beginners to trade consistently with just one currency pair.

If you are trading one pair regularly every day you will soon get used to how much a pip means in terms of your actual gains and losses in your account. You will know how much one pip is worth in dollars or in your own currency.

But when you are trading several different currency pairs, you have to deal with pips of different value. If you get confused, you could be taking greater risks than you planned or closing trades with less profit than you thought. It is much easier to deal with only one pair at first until you have a sound understanding of trading practices and forex pip values.

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Thursday, June 18th, 2009 Glossary, Introduction No Comments