Understanding and knowing the proper terminology with the forex market as you trade at cfd trading South Africa is important to become a trader who is successful. The following are the descriptions of terms such as lots, pips, leverage and margin.
Lots and pips
The currency traders quote the currency pair value, and the trade sizes in lots and pips. A pip is the smallest amount which the currency pair value can change, although nowadays there are certain brokers offering fractional quotes for pips also. When for example the EUR/USD pair value goes high by a single tick which is the pip while the quote tends to move from 1.5678 to about 1.5679, with the size movement being a single pip.
As a beginner in trading, the important guideline is to measure the loss or success in an amount by the pips instead of the real dollar value. A single pip gain is about $10 account, is the same, in terms of the skills of the trader, to a single pip in a $1000 account even though the real dollar amount is different.
The size which is smallest in the currency trading for the professional traders is referred to as the lot. For the pairs which are USD based, the l size is 100,000. In other words, when entering the trader using the margin account, the smallest amount which you can be able to sell or buy is 100k irrespective of your margin size.
Leverage and margin
Another concept that is important in the currency trading is the twin phenomenon of the leverage and the margin. It is a concept which carries a higher risk degree, but because the fore prices move quite slowly in terms of the real value change, most of the traders leverage their account when engaging in trading in the short term.
When opening a forex account, the broker will request depositing of a small sum which is referred to as a margin, as insurance against the losses that your account might suffer. With a small amount of sum, you are able to control an amount which is large; enabling greater gains, but also greater losses as compared to what is likely to be achieved with your deposit.
It is quite easy understanding the leverage and margins in the complex process of borrowing. The lots which you can trade are normally borrowed from your broker, requiring a deposit margin as insurance in case of losses. The ratio which is between the funds which you borrow, and the margin deposited as insurance is referred to as leverage.
And in case you set a ratio of leverage of 100:1 enabling the trader of $1,000,000 with 10,000USD in deposit, but at the end you trade with just 100,000 the real leverage which you would be utilizing is 10:1. You have to remember that, leverage that is over 50:1 for majors and the 20:1 for minors is not traders that you can get in the USA markets.