Forex trading is becoming more and more popular in Vietnam, even though it is not legally regulated. However, brokers with licenses from foreign countries, as well as offshore dealers, are ready to provide their services to traders from Vietnam.
In this regard, the issue of financial literacy becomes acute. After all, the more knowledge the traders have, the more difficult it will be for scammers to deceive them. Pips and lots occupy a special place among terms that require at least some understanding, without which it is not possible to trade successfully. So, what is a lot?
The Basic Idea of Lots
In financial markets, standardized volumes of traded assets are called lots. Also, these assets are defined as trading instruments. Lots are the measure of such assets as:
- barrels of oil
- grams of gold
- amount of some currency
- units of shares, etc.
The unit of measurement is a standard lot, and it is equal to 100 thousand units of any currency.
Lot types
Of course, 100 thousand is a large amount, and many traders simply would not come to the market if Forex allowed opening trades with an amount no less than this. Therefore, in practice, it was decided to allocate smaller units of a standard lot:
- 10 thousand — for a mini-lot
- 1 thousand — for a micro lot
You can also open trades with fractional positions. For example, 0.75 lots will equal 75 thousand currency units.
Relationship Between Lots and Pips
What is a pip? A pip is the smallest deviation of the current value of your chosen trading instrument. With their help, you can predict profits and losses during trading.
The value of a pip depends on the lot size used to open a trading position. It also matters whether the trading position is opened with a four-digit or five-digit quote:
- With a five-digit quote and an order of 1 lot, the value of a pip will be 1 currency unit.
- A four-digit quote with the same order will make 10 currency units.
Should a Trader Listen to the Advice of Trading Platforms?
It seems that lots and pips are very simple concepts, but without understanding them, it is impossible to estimate an expected profit and conduct successful currency trading. Therefore, when working with a trading terminal, a trader is given recommendations regarding the lot put for opening a position, as well as other information useful for planning transactions. However, the last word and decision remain with the trader.
Should you heed these recommendations? If you are an experienced trader, you can rely exclusively on your huge experience built on successes and losses. But since more and more investors in Vietnam are getting involved in the foreign exchange market, and they do not always have deep knowledge in the field, it is better for beginners to follow these recommendations.
The Importance of Proper Lot Calculation
When calculating a trading lot, it is important to understand that sometimes trading can be loss-making. For example, this happens in the case when:
- you’ve chosen the wrong strategy;
- you’ve chosen the right strategy but applied it incorrectly;
- you did not pay attention to critical signals, etc.
In this case, you can lose the entire deposit if the lot was calculated incorrectly. To prevent this from happening, experienced traders advise placing on hold from 3% to 5% of the capital per trade.
The concept of lots and pips is the foundation of Forex trading. The amount of your future profit depends on how detailed your knowledge is. Correctly calculated profit will materialize in the future!