You Must Know Basic Terminology Trading

basic terminology trading

You can learn everything about trading. This is the third chapter of the Beginner Course, we are going to
talk about Basic Terminologies.

In this chapter, you will learn about :

  • Understanding a Lot, Pip and Pipette, Rollover and Swap
  • How to calculate the value of a Pip
  • How to calculate a Swap

Understanding a Lot

A lot is the standardized number of units of
an asset being traded.

Forex is commonly traded in specific
amounts called lots, or basically the
number of currency units you will buy or
sell. It’s like an Egg Carton. When you buy
an egg carton, you will buy a carton which
includes 10 eggs.

Normally, Lot can be classified into
Standard Lot, Mini Lot, Micro lot and Nano

  • 1 standard lot is equal to 100.000 unitsof the base currency in a forex trade.
  • 1 mini lot is equal to 10.000 units of thebase currency in a forex trade andcommonly used by beginners that are new to the market and learning how to trade.
  • 1 micro lot is equal to 1000 units of the base currency in a forex trade.
  • 1 nano lot is equal to 100 units of the base currency in a forex trade.

Understanding a PIP

A Pip, short for “percentage in point” or
“price interest point”. A pip is the most basic
unit of measure in Forex Trading and the
smallest price move that an exchange rate
can make based on forex market

A pip is usually the last decimal place of a
price quote. Most pairs go out to 4 decimal
places, but there are some exceptions like
Japanese yen pairs (they go out to two
decimal places). For Example: If EUR/USD
moves from 1.1050 to 1.1051, that .0001
USD rise in value is ONE PIP.

The change in a currency value relative to
another is measured in “pips” which is a
very, very small percentage of a unit of
currency’s value.

Trading Standard Lot: 1pip movement
for a $10 change.

For example, if you buy $100,000 against
the Japanese yen at a rate of ¥110.00 and
the exchange rate moves to ¥110.50, which
is a 50 pip movement, you have made

Conversely, if the exchange rate falls 50
pips to ¥109.50 your net profit and loss are
minus $500.

Trading Mini Lot: 1pip of a currency pair
based in U.S. dollars is equal to $1.00,
compared to $10.00 when trading a
standard lot.

Trading Micro Lot: 1pip of a currency
pair based in U.S. dollars is equal to just

Trading Nano Lot: 1pip of a currency
pair based in U.S. dollars is equal to just

Understanding a Pipette

There are forex brokers that quote
currency pairs beyond the standard “4 and
2” decimal places to “5 and 3” decimal
places. They are quoting FRACTIONAL
, also called “points” or “pipettes.”

A “point” or “pipette” or “fractional pip” is
equal to a “tenth of a pip”. For Example: if
GBP/USD moves from 1.30542 to 1.30543,
that .00001 USD move higher is ONE

How to Calculate The Value of a PIP

As each currency has its own relative value,
it’s necessary to calculate the value of a pip
for that particular currency pair.

Example: USD/CAD = 1.0200
(use a quote with 4 decimal places)

(The value change in counter currency)
times the exchange rate ratio = pip value
(in terms of the base currency)

[0.0001 CAD] x [1 CAD/1.0200 CAD] Or
simply as:

Using this example, if we traded 10,000
units of USD/CAD, then a one pip change to
exchange rate would be approximately a
0.9804 USD change in the position value
(10,000 units x 0.00009804 USD/unit).

We say “approximately” because as the
exchange rate changes, so does the value
of each pip move.

Understanding Rollover

Rollover is the procedure of moving open
positions from one trading day to another.
If a trader extends his position beyond one
day, he/ she will be dealing with a cost or
gain, depending on prevailing interest rates.

Most brokers and trading platforms perform
the rollover automatically by closing any
open positions at the end of the day, while
simultaneously opening an identical
position for the following business day.

Understanding Swap

A swap is the interest rate differential
between the two currencies of the pair you
are trading and charged when you keep a
position open overnight.

During this rollover, a swap is calculated.

A swap is a FEE that is either paid or
charged to you at the end of each trading
day if you keep your trade open overnight.
If you are paid swap, cash will be added to
your Balance, if you are charged swap, cash
will be deducted from your Balance.

All open forex positions at the end of the
day (5:00 PM New York time) are
automatically rolled over to the next
settlement date.

How to Calculate Swap

For forex, here’s the formula to calculate swap:

In the spot forex market, trades must be
settled in two business days.

For example, if a trader sells 100,000
pounds on Monday, then the trader must
deliver 100,000 pounds on Wednesday
unless the position is rolled over.

All open forex positions at the end of the
day (5:00 PM New York time) are
automatically rolled over to the next
settlement date.

The rollover adjustment is simply the
accounting of the cost-of-carry on a
day-to-day basis.

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