Pips

Okay, now back to our program. To start, you have to understand what a

"pip" is. A pip is the last number to the right in a currency. For example:

If the EUR/USD traded at 1.1335 this morning. The "5" is the pip. If it moved to

1.1535, which it did today, that would be a 200-pip move.

The next concept that you need to understand is the concept of leverage.

It’s a lot like margin in stock trading, only on steroids. It’s a simple concept.

If you have $10,000 to trade with, your forex broker will let you borrow money

from him so that you can trade in larger quantities. They will let you borrow

as much as 400 times (400:1) what you put up in a trade. Most brokers allow

between 50:1 and 100:1 margin. So, if you put up $1,000, and your broker

allows 100:1 margin, then you’ll be trading $100,000 worth of currency (instead

of $1,000).

That’s important, because every pip equals a certain dollar amount. When you

trade $10,000, each pip movement equals $1. The chart below shows how it

goes from there.

If you trade 1,000,000 worth of currency, each movement would be equal to

$100. So if you bought at 1.1445 and sold at 1.1545, you would make 100 x $100,

or $10,000. Now, I don't know about you, but I could live off of that much.

That's not saying, however, that you can make $10,000 per day. Of course

it's possible, but there are a lot of factors that make it very difficult. Like, how

do I know that it's going up or down?

When should I get in a trade?

Even more importantly, can you deal with the emotions of forex trading?

Alan Farley, a trading expert, rightly observes that mastering the emotions of

trading is more difficult than mastering the technical skills. You’ll soon find

out what he means by that.

Amount Traded    $ Per Pip

$10,000                     $1

$50,000                     $5

$100,000                   $10

$500,000                   $50

$1,000,000                $100

$5,000,000                $500