Why Small Movements Can Mean Big Money when Trading Forex

by Andrew McGuinness     Jul 16, 2019

If you're interested in Forex Trading, you've probably already heard of a "pip-" but if you haven't let us explain how this basic unit of currency is able to multiply into massive profits. A pip is basically the equivalent of 0.0001 of a dollar when converted from most currency pairs; in the lower-valued Japanese yen, it is equivalent to 0.01 of a single yen. A pip is the smallest increment that can be traded on the Forex market, and it's the building block of most successful trades. As a beginning trader, you may be asking yourself how trading an increment of currency that's so small and irrelevant can ever become a profitable endeavor, or build up anyone's finances to a level in which they can actually quit their day job and trade Forex full time. Though the pip may be tiny, it's power can quickly become massive when it is traded in bulk- and with almost $2 trillion moving on the Forex market in a single day, the power of pips can turn into a force to be reckoned with on a moment's notice.

How Forex Traders make money is by transferring large amounts of money from one currency into another through a process that involves buying and selling with other traders. Before the 1990's, the Forex market was largely limited to governments and international institutions like corporations and banks. It was only recently made available to the public thanks to brokerage firms catering to the needs of everyday investors and lowered marginal caps. These days, the standard transaction in Forex Trading is called a lot and is valued at 100,000 Units. Now, let's return to the pip: a single lot movement means that there is the potential for massive gain should the value of the currency move only by a few pips because at this rate, a single pip's movement is equivalent to $10. This means that an investor can quickly move into and out of profits if he is able to correctly anticipate which currencies will increase or decrease in value, and every time they move by even a pip he is able to make money off of the difference when he buys or sells.

Now is one of the best times for a new investor to move into Forex Trading. Until recent years, there was no such thing as a Forex Trader that moved money between countries to provide on the exchange rates, but the world today has made this not only possible, but an option for a full time career for the traders who have discipline and know how to predict profitable currency pairs. Beginner Forex Traders are encouraged to start their trading journeys by taking a Forex Trading Course provided by free here at Trading 101, so they can make sure they are prepared before investing money.

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