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Understanding PIPs and LOTs in British Forex Trading

A pip (percentage in point) is a unit of measurement used to indicate the change in value between two currencies. It is generally the fourth decimal place in a currency pair and is also known as Points. In forex trading, pips are very important because they can be earned or lost on every trade. Traders aim to make as many pips as possible on winning trades while limiting their losses to pips they are happy with.

Lots, meanwhile, are units of trade volume. When you open a position in forex, you buy or sell a certain number of lots. The size of each lot will depend on the broker you use and the currency pair you are trading. For example, a standard lot for EUR/USD is 100,000 units. So, 1 lot of EUR/USD means you are buying 100,000 Euros and selling US dollars.

Many brokers also offer mini and micro-lots, 10,000 and 1,000 units, respectively, making it less complex for beginner traders to get started in the best forex brokers without committing large sums of money.

In forex trading, pips and lots are two critical concepts you need to understand to succeed. By learning what they are and how they work, you will make better trading decisions and improve your chances of success.

How can you use pips and lots for successful forex trading?
Use pips to limit your losses

When trading forex, it is essential to set limits on how much you are prepared to lose on any given trade. It helps to protect your capital and reduce your overall risk. One way of doing this is to use pips as a stop-loss mechanism.

If you enter a trade with a stop loss of 50 pips, for example, this means that you will automatically exit the trade if the currency pair moves 50 pips in the wrong direction. It helps to ensure that you don’t lose too much money on any trade and always have some protection in place.

Use pips to take profits

Another use of pips is to take profits from successful trades. If you are in a prosperous trade and the currency pair moves in your favour by 50 pips, for example, you can close the trade and take your profits. It is a simple way of locking profits on successful trades and ensuring that you make money from your wins.

Use lots to control your risk

As well as using pips to limit your losses and take profits, you can also use LOTS to control your overall risk. You can choose how much money you are prepared to lose on any trade.

For example, buying 1 lot of EUR/USD, you are risking 100,000 Euros to make a potentially more significant profit. Alternatively, if you buy 0.1 lot of EUR/USD, you are risking 10,000 Euros to make the same profit. It allows you to trade with a smaller capital while still making potentially enormous profits.

Use lots to target a specific profit

You can also use lots to target a specific profit on a trade. In other words, you specify how much money you want to make on a given trade and then find a currency pair that offers this level of profitability.

For example, if you want to make a profit of 200 pips on your trade, you need to find a currency pair that offers a minimum return of 2%. Alternatively, if you want to make £100 profit, you need to find a currency pair that offers a minimum return of 1%. By using this method, you can easily find trading opportunities that offer a good level of profitability.

Use lots to trade multiple pairs

Another way of using lots is to trade multiple currency pairs simultaneously, spreading your risk over different trades and reducing the chances of losing money on any one trade.

If you buy 1 lot of EUR/USD, you are automatically buying 100,000 Euros worth of each currency. It allows you to trade two different currency pairs simultaneously without having to invest a large amount of capital.

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