In this article, I will be discussing what is pips in forex trading and how to calculate it.
What is a pip? A pip stands for percentage in point or price interest point and it is the smallest price change a currency can fluctuate.
It is simply the difference between the initial price of a currency pair before it moves and after it has moved.
Forex trading has to do with the exchange of currencies through price movement and price moves when traders buy or sell. As a result, price movement is usually calculated in PIPS.
HOW TO CALCULATE THE NUMBER OF PIPS IN FOREX TRADING.
Let us take some examples :
Suppose the currency pair EURUSD; remember that EUR is the base currency while USD is the counter, moved from a price of 1.12220 to 1.12350, how many pips were accumulated?
This is a bullish price movement because the price went higher than its initial position.
To calculate the number of pips, all we have to do is to subtract the initial price from the current price. Now, let’s do some simple mathematics:
Initial price = 1.12220
Current price = 1.12350
Number of pips = 1.12350 – 1.12220
= 130 pips. This means that price made a 130 pips move from its initial position.
In calculating the number of pips, the numbers after the decimal are considered first which is why we have 130 instead of the usual 0.00130.
Now, let’s take another example for a bearish movement where EURUSD moved from 1.12220 to 1.12120. How many pips were made?
Since it is a bearish move, the number of pips will be the subtraction of the current price from the initial price. Which gives:
1.12220 – 1.12120 = 100 pips .
Let us take another example for a currency pair like EURJPY with just three digits after the decimal :
Mr. John, an amateur forex trader, entered long when EURJPY was 129.275. After some moments, the price moved to 129.045. How many pips did he gain or lose?
Was the trade a profitable one for Mr. John?
Price made a bearish move from 129.275 to 129.045.
Number of pips = 129.275 – 129.045
= 230 pips
The trade was not a profitable one for Mr.John because he went long for a bearish move and lost 230 pips.
Now, let’s take a picture illustration:
From this image, the price made a bearish move from point C to point D. To calculate the number of pips here, all we need to do is to subtract the price at point D from point C.
From the image, the price made a bullish move from point A to point B and the number of pips made will be the subtraction of price at point B from the price at point A since it is a bullish move.
HOW PIPS NUMBER AFFECT PROFIT IN FOREX TRADING.
In the forex market, a trader makes a profit when he can predict correctly the direction of price movement for any currency pair he decides to trade.
The higher the pips accumulated, the higher the profit. The higher the pips lost, the higher the loss.
The knowledge of pips calculation and determine the enormity of a trader’s profit or loss.
A pip is simply the change in the price of a currency pair in the forex market.
For a bullish move, the number of pips made will be the subtraction of the initial price from the current price.
For a bearish move, the number of pips made will be the subtraction of the current price from the initial price.
Pips help traders calculate and set their “stop-loss and take profit”. They are measuring units that traders use to estimate their profits and loss.
Finally, the financial market has rules that guide trading in it. Not everyone can trade.
An individual must acquire and understand the knowledge of fundamental analysis, technical analysis, and trading psychology before he or she can be able to make a profit as a trader.
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