Forex Price Movements: Pips and
The actual price movements in the forex
market are typically pretty small, with one cent being a fairly large
change in value.
However, through the use of leverage, a forex trader
can make a lot of money from the movement of only one penny.
The smallest units of measurement in
the forex market are pips and pipettes. A pip is one hundredth of a
cent, which means 100 pips is equal to one cent.
If a person trades
with 50,000 units (which is feasible with only about $1,000 of
margin, assuming 50x leverage), then each pip would be worth $5 and a
gain of 100 pips is worth $500.
As you can see, making money in the
forex market has greater possibilities than any other financial markets,
largely due to the ability to use high leverage. Granted, leverage is
a double-edged sword that both accelerates your gains but also can
escalate your losses – so it should be used carefully.
A pipette is simply one tenth of a pip,
which allows for the use of partial pips. It is not uncommon to see
spreads like 1.5 pips (or 1 pip and 5 pipettes).
Forex Traders and the Forex Market
Many forex traders think they are
trading in the actual forex market, but this is slightly incorrect.
As an individual, it is impossible for you to directly participate in
the forex market. Even in the example above of you visiting Europe, you are not trading directly with the forex market, but rather with a market-maker.
Instead, the major market participants
are banks and large financial institutions. Therefore, when a forex
trader makes a trade, they are actually trading with their forex
broker, who is then trading with one of these financial institutions.
This fact is important to understand,
because it means that the reputation of the broker matters since they
are the ones taking the other side of your trades.
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