TRADE FOR PIPS, NOT FOR PROFIT
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
A forex trader wants to make a pip (or a point). A pip is actually 1/10000th of a cent. A cent is called a 'big figure' or 'figure'. Take the EURO for example.
EUR/USD 1.2550 (That's EURO vs. USDollar)
A PIP IS THE 0. A MOVE FROM 1.2550 TO 1.2560 IS A 10 POINT MOVE.
If you are at an airport you're going to get a rate of 1.25 - .25 is a quarter. The last 2 digits are rounded.
It may take weeks or months for the EURO to move from 1.25 to 1.30, and traders are far too reckless to wait that long. So they instead focus on smaller moves and trade larger sizes.
When traders start calculating their profit and loss they will for sure lose their ability to make a trade. Making a trade for 10 pips on 1,000 or 1million or 10million is the same. Traders try to average a pip average a day regardless of the amount of money they are trading.
The only thing is when dealing with large sizes the market changes slightly. If you buy 50 million Euros for example, you may drive the market up 5 or 10 points. In other words traders making 100 pips a day trading a million dollars cannot execute the same strategies with a billion. At around 10 million it becomes a different ballgame. Usually traders who trade with banks come down and manage funds they end up losing because it's a different strategy all together.
ACCOUNT LEVERAGE EXPLAINED
Say you have a $10,000 account. If you buy 10,000 EUR/USD you're looking at a Profit/Loss of $1 per pip. If the euro moves from 1.2550 to 1.2560 you will make $10. If you trade 100,000 you will make $100. 1,000,000 = $1,000 and so on. It's just a question of RISK MANAGEMENT. How much pain are you willing to take if the trade goes against you?
The spread can range from 1 point to 5 points depending on the cross and market liquidity at the time, so you will start off in the hole a few points. The more liquidity, the tighter the spread, as stands to reason. So usually the EUR/USD is the tightest while the NZD/USD may start at 5 and have a max spread of 10 or even 15. Obscure currencies like the Indian Rupee may have 50 point spreads. Trader's usually stick to the 8 majors (British Pound,US Dollar,Euro,Yen,Ozzie,Kiwi,Canadian,Swiss).
