Forex trading has become increasingly popular over the years, and with the rise of technology, it has become more accessible to the masses. One of the most important aspects of forex trading is understanding the concept of pips. Pips are a unit of measurement used in forex trading to indicate changes in currency values. In this article, we will explore what pips are, how they are calculated, and how much they are worth in forex trading.
What are Pips in Forex Trading?
Pips, short for “percentage in point,” are the smallest unit of measurement used in forex trading. They are used to measure the price movement of a currency pair. For example, if the EUR/USD currency pair moves from 1.1000 to 1.1005, it has moved 5 pips. In forex trading, the value of a currency pair is expressed in pips.
How to Calculate Pips
Calculating the value of pips is essential for forex traders to determine the profit or loss of a trade. The calculation of pips is straightforward, and it depends on the currency pair being traded. The formula used to calculate pips is as follows:
Pip Value = (Pip in decimal places * Trade Size) / Exchange Rate
For instance, suppose you are trading the EUR/USD currency pair, and you buy one lot of 100,000 units at an exchange rate of 1.1000. If the exchange rate moves from 1.1000 to 1.1005, you have gained 5 pips. To calculate the pip value, we use the above formula:
Pip Value = (0.0001 * 100,000) / 1.1000 = $9.09
Therefore, if you gained 5 pips, you have made a profit of $45 (5 * $9.09).
How Much is a Pip Worth?
The value of a pip depends on the currency pair being traded, the size of the trade, and the exchange rate. The value of a pip is higher for currency pairs with a higher exchange rate and a larger trade size.
For example, if you trade one lot of the EUR/USD currency pair, where the exchange rate is 1.1000, and you gain 10 pips, the value of a pip would be $9.09. However, if you trade one lot of the GBP/USD currency pair, where the exchange rate is 1.3000, and you gain 10 pips, the value of a pip would be $13.33.
The value of a pip is also affected by the type of account you have. If you have a standard account, the pip value will be the same as the currency denomination of your account. For example, if you have a USD account, the pip value will be $1 for a standard lot. However, if you have a mini account, the pip value will be ten times lower than that of a standard account.
Understanding the concept of pips is crucial for forex traders to make informed decisions while trading. Pips indicate the price movement of a currency pair, and they are used to calculate the profit or loss of a trade. The value of a pip depends on the currency pair being traded, the size of the trade, and the exchange rate. The more pips gained, the higher the profit, and the more pips lost, the higher the loss. Therefore, it is essential to have a clear understanding of pips and their value to succeed in forex trading.