Are you struggling to grasp the concept of pips in forex trading? You’re not alone. Many beginners find it challenging to understand the importance of pips and how they can influence their trading decisions.
In this article, I’ll break down the concept of pips in a way that’s easy to understand, even for those who are new to the world of forex trading. I’ll walk you through what pips are, how they work, and why they’re crucial for your success as a Forex trader.
By the end of this comprehensive guide, you’ll have a solid understanding of what pips are in forex trading, and you’ll be equipped with the knowledge to make better-informed decisions in your trading journey. Get ready to unlock the door to a world of forex success!
What is Pips in Forex Trading? – Definition
A pip, short for “percentage in point” or “price interest point,” is the smallest price increment used in forex trading.
It represents the smallest change a currency pair can make and is typically equal to 0.0001 or one one-hundredth of a percent.
For currency pairs involving the Japanese yen, a pip is equal to 0.01 since the yen is quoted in two decimal places.
It is simply the difference between the initial price of a currency pair before and after it has moved.
Forex trading involves 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.
This standardization allows traders to easily compare currency pairs and make informed decisions about which pairs to trade.
Additionally, pips are essential for setting a stop loss, taking profit levels, managing risk, and measuring trading performance.
Understanding the Difference Between Pipettes and Pips.
When it comes to forex trading, it’s essential to understand the difference between pipettes and pips.
A pip is the smallest unit of measurement for currency movements, typically representing a change in the fourth decimal place of a currency pair.
However, some brokers use pipettes, which are a tenth of a pip and represent a change in the fifth decimal place.
So, if the EUR/USD currency pair moves from 1.1000 to 1.1001, that’s a movement of one pip.
But if it moves from 1.10000 to 1.10001, that’s a movement of one pipette. Understanding the difference between these two units of measurement is crucial for accurate trading and risk management.
HOW TO CALCULATE PIPS IN FOREX TRADING.
Pip calculation for major currency pairs
For major currency pairs, which usually include the U.S. dollar (USD), pips are calculated based on the fourth decimal place in the exchange rate.
To calculate the number of pips in a price movement, you subtract the starting exchange rate from the ending exchange rate and then multiply the result by 10,000.
Here’s an example:
Suppose the EUR/USD currency pair moves from 1.1200 to 1.1245.
To calculate the pip movement, you would do the following:
(1.1245 – 1.1200) x 10,000 = 45 pips
Pip calculation for minor currency pairs
The pip calculation may vary for minor currency pairs, which do not include the U.S. dollar.
Generally, the pip value is calculated based on the second decimal place for pairs involving the Japanese yen (JPY) and the fourth decimal place for other pairs.
Here’s an example of a JPY currency pair:
Suppose the AUD/JPY currency pair moves from 79.20 to 79.35. To calculate the pip movement, you would do the following:
(79.35 – 79.20) x 100 = 15 pips
For other minor currency pairs, the calculation would be similar to that of major currency pairs:
Suppose the EUR/GBP currency pair moves from 0.8900 to 0.8925. To calculate the pip movement, you would do the following:
(0.8925 – 0.8900) x 10,000 = 25 pips
Converting Pips to Monetary Values
To convert pips to monetary values, you’ll need to know the pip value for the currency pair you’re trading.
The pip value varies depending on the size of your trade and the currency pair.
For example, in a standard lot (100,000 units) of a major currency pair, one pip is usually worth $10. For a mini lot (10,000 units), one pip is worth $1.
Examples of profit and loss calculations using Pips
Example 1: You buy 1 standard lot of EUR/USD at 1.1200 and sell it at 1.1245. The pip movement is 45 pips (1.1245 – 1.1200). Your profit in dollars is 45 pips x $10/pip = $450.
Example 2: You sell 1 mini lot of GBP/USD at 1.3900 and close the position at 1.3940. The pip movement is -40 pips (1.3940 – 1.3900). Your loss in dollars is -40 pips x $1/pip = -$40.
IMAGE ILLUSTRATION:
Now, let’s take a graphical illustration:
From this image, the price made a bearish move from point C to point D. To calculate the number of pips here, we only need 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 subtract the price at point B from the price at point A since it is bullish.
FAQ
Pips are the smallest price movement in the forex market, typically representing a change of one basis point (0.0001) in the exchange rate.
PIP stands for: PIP is an acronym for “Percentage in Point” or “Price Interest Point.”
1.1 ATR in pips: A 1.1 Average True Range (ATR) represents 1.1 times the average range of price movement for a given currency pair, measured in pips.
1 pip worth: The value of 1 pip varies depending on the lot size and currency pair but is typically around $0.10 for a micro lot, $1 for a mini lot, and $10 for a standard lot.
10 pips is a price movement of 0.0010 in the exchange rate, representing a profit or loss of $1, $10, or $100, depending on the lot size.
20 pips in forex: 20 pips is a price movement of 0.0020 in the exchange rate, representing a profit or loss of $2, $20, or $200, depending on the lot size.
50 pips is a price movement of 0.0050 in the exchange rate, which could represent a profit or loss of $5, $50, or $500, depending on the lot size.
100 pips is a price movement of 0.0100 in the exchange rate, which could represent a profit or loss of $10, $100, or $1,000, depending on the lot size.
1000 pips is a price movement of 0.1000 in the exchange rate, representing a profit or loss of $100, $1,000, or $10,000, depending on the lot size.
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.
SUMMARY
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 subtract 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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