Forex trading is a lucrative opportunity for people looking to invest in the foreign exchange market. However, to be successful in forex trading, you need to understand the basic terminologies and concepts associated with it. One of the most important concepts in forex trading is Pips.
Pips are a unit of measurement used in forex trading. They represent the smallest movement that a currency pair can make. The term pip is short for “percentage in point” or “price interest point.”
In forex trading, currency pairs are quoted in two prices, the bid price and the ask price. The bid price is the price at which you can sell the base currency, and the ask price is the price at which you can buy the base currency. The difference between the bid price and the ask price is called the spread.
The pip value is calculated based on the size of the trade and the exchange rate of the currency pair. The value of a pip varies depending on the currency pair being traded, the exchange rate, and the size of the trade.
For example, let’s say you are trading the EUR/USD currency pair. The current exchange rate is 1.1205, and you have bought 10,000 units of the base currency (EUR). The pip value for this trade would be calculated as follows:
Pip value = (0.0001 / 1.1205) x 10,000 = $0.89
This means that for every pip that the EUR/USD currency pair moves, your profit or loss would be $0.89.
Pips are important because they determine the profit or loss on a trade. If you are trading with a leverage, the profit or loss can be magnified. For example, if you are trading with a 100:1 leverage, a 1 pip move can result in a profit or loss of $89.
In forex trading, it is important to understand the risk associated with trading. The amount of risk you take on a trade depends on the size of the trade and the stop loss level. A stop loss is an order to close a trade at a predetermined price in order to limit losses.
For example, let’s say you have bought the EUR/USD currency pair at 1.1205, and you have placed a stop loss at 1.1180. This means that if the currency pair moves 25 pips against you, your trade will automatically close, limiting your losses.
Pips can also be used to calculate the profit or loss on a trade. Let’s say you have bought the EUR/USD currency pair at 1.1205, and you have sold it at 1.1225. This means that you have made a profit of 20 pips. The profit on this trade would be calculated as follows:
Profit = (20 pips x $0.89) = $17.80
In conclusion, pips are an important concept in forex trading. They represent the smallest movement that a currency pair can make, and the pip value depends on the size of the trade and the exchange rate of the currency pair. Pips are used to calculate the profit or loss on a trade, and it is important to understand the risk associated with trading. By understanding pips and how they work, you can make informed trading decisions and increase your chances of success in forex trading.
