Forex pips are the smallest unit of price movement in the foreign exchange market. They are used to measure the change in the exchange rate of two currencies. Understanding how to count forex pips is essential for any trader who wants to make profits in the forex market. This article will explain what forex pips are and how to count them.
What are forex pips?
Forex pips are the fourth decimal point in the exchange rate of two currencies. For example, if the exchange rate between the US dollar and the euro is 1.1234, the fourth decimal point (4) is the pip. This means that the exchange rate has increased by one pip if it moves from 1.1234 to 1.1235, and it has decreased by one pip if it moves from 1.1234 to 1.1233.
Forex brokers usually quote exchange rates up to four or five decimal places. The fifth decimal place is known as a fractional pip, which is not commonly used by traders. Forex pips are important because they determine the profit or loss of a trade.
How to count forex pips?
To count forex pips, you need to understand how to read the exchange rate quote. The exchange rate quote consists of two currencies, the base currency, and the quote currency. The base currency is the first currency in the pair, and the quote currency is the second currency.
For example, in the currency pair EUR/USD, the euro is the base currency, and the US dollar is the quote currency. If the exchange rate of EUR/USD is 1.1200, it means that one euro can buy 1.1200 US dollars.
To count forex pips, you need to subtract the bid price from 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.
For example, if the bid price of EUR/USD is 1.1198, and the ask price is 1.1202, the difference between the two prices is four pips. This means that the spread of EUR/USD is four pips.
To calculate the profit or loss of a trade, you need to know the size of the trade and the number of pips gained or lost. The size of the trade is usually measured in lots. A standard lot is equal to 100,000 units of the base currency, a mini lot is equal to 10,000 units, and a micro lot is equal to 1,000 units.
For example, if you buy one standard lot of EUR/USD at 1.1200 and sell it at 1.1300, you have gained 100 pips. If the exchange rate moves in the opposite direction, you will lose pips.
Conclusion
Forex pips are the smallest unit of price movement in the foreign exchange market. They are used to measure the change in the exchange rate of two currencies. To count forex pips, you need to understand how to read the exchange rate quote, subtract the bid price from the ask price, and calculate the profit or loss of a trade. Understanding how to count forex pips is essential for any trader who wants to make profits in the forex market.
