PIPs and LOTs are the two main trading instruments used in Dubai forex trading. They can be distinguished based on their underlying assets and their associated risks. This article will discuss the components of PIPs and LOTs, including their advantages and disadvantages, and how they are used in Dubai forex trading.
A PIP, or price improvement protocol, is a system that allows traders to make trades at more favourable rates than would otherwise be available on exchanges. A LOT, or limited order trading, involves placing orders with specific restrictions to achieve particular objectives.
A PIP is the slightest price movement in a currency pair and is used to calculate profits or losses when trading. A LOT is a pre-determined amount, either fixed or variable. You can use it to take a profit, protect against volatility, achieve rapid entry into trades, and control risk.
Advantages of using PIPs
PIPs allow you to get preferential rates on trades
Preferential rates are available due to PIPs because they provide traders access to the interbank market. You can get better rates than what would be available on a traditional exchange or other trading platforms.
PIPs offer more transparency and flexibility
PIPs are based on an open-source platform, which means they are highly transparent. They also have flexible order types, so you can specify exactly how much risk you want to take in each trade.
You can use PIPs to avoid market manipulation
Market manipulation occurs when large traders attempt to influence the prices of certain assets by trading at moments when there is low liquidity in the markets. By leveraging a PIP, you can improve price visibility for your trades and avoid being affected by such instances of market manipulation.
Disadvantages of using PIPs
PIPs are more complex than other trading instruments
As a trader, you will need to understand the various components of PIPs to use them effectively. It can be challenging for many traders and may discourage some people from using this trading instrument.
There is a higher market risk with PIPs
When you make trades using a PIP, there is no guarantee that your trade will go through at the best rate possible. Your transaction may not be executed as intended, resulting in losses or missed profits.
Advantages of using LOTs
You can use LOTs to achieve rapid entry into trades
LOTs are a type of order that allows you to specify the price at which you want to trigger your trade and the size of your transaction. Therefore, it is easier for traders to enter new positions rapidly and efficiently.
You can use LOTs to control risk in trades
LOTs also allow traders to set maximum loss and profit amounts for each trade, giving them more control over their risk exposure, making LOTs an attractive trading instrument for many traders who value flexibility and control in their trades.
You can use LOTs to take advantage of market volatility
You can make trades even during volatile market conditions by setting a limit order, allowing you to take advantage of market price fluctuations and profit from large movements in exchange rates.
Disadvantages of using LOTs
Some traders may find it challenging to manage their risk with LOTs
While LOTs allow you to control your risk more precisely, they require some skill and knowledge to configure them successfully. If traders cannot adequately assess their risk exposure when using these instruments, they may lose money on trades.
You will need good market information for LOTs
To use LOTs effectively, you will need access to the latest market information, which can be challenging if you do not have reliable sources of market intelligence and price feeds for trading.
How to trade forex using PIPs and LOTs
- Research different forex trading platforms to find one that offers PIPs or LOTs as an instrument.
- Familiarise yourself with the components of PIPs and LOTs, including order types and trade risk management features.
- Trade using a demo account to gain more experience making trades with these instruments.
- Monitor your performance closely and make adjustments as needed based on market conditions. With knowledge and practice, you can become skilled at trading forex using PIPs and LOTs to achieve profitable returns over time.
For more information on forex trading, you can contact Saxo Dubai.