Forex trading is a highly volatile market that involves the exchange of different currencies. As a forex trader, it is essential to understand how to count pips. Pips, which stands for ‘percentage in point’, is the smallest unit of price movement in the forex market. It is used to calculate profit and loss in a forex trade. In this article, we will explain how to count pips in forex.
What is a pip?
A pip is a unit of measurement that represents the smallest change in the price of a currency pair. It is usually measured to the fourth decimal place, except for some currency pairs that are quoted to the second decimal place. For instance, if the EUR/USD currency pair moves from 1.1200 to 1.1201, it has moved by one pip.
How to calculate pips
Calculating pips is a simple process that involves the following steps:
Step 1: Determine the currency pair
The first step in calculating pips is to determine the currency pair you want to trade. Each currency pair has a base currency and a quote currency. The base currency is the currency on the left, while the quote currency is the currency on the right. For example, in the EUR/USD currency pair, the base currency is the euro, while the quote currency is the US dollar.
Step 2: Identify the quote currency
The second step in calculating pips is to identify the quote currency. The quote currency is the currency that is used to quote the exchange rate. For instance, in the EUR/USD currency pair, the quote currency is the US dollar.
Step 3: Determine the pip value
The third step in calculating pips is to determine the pip value. The pip value is the amount of money that is gained or lost on a trade for every pip movement. The pip value varies depending on the currency pair and the lot size.
For example, if you are trading a standard lot size of 100,000 units of the EUR/USD currency pair, the pip value would be $10. This means that for every pip movement, you will gain or lose $10. If the EUR/USD currency pair moves by 10 pips, you will gain or lose $100.
Step 4: Calculate the profit or loss
The final step in calculating pips is to calculate the profit or loss. To calculate the profit or loss, you need to multiply the pip value by the number of pips gained or lost. If you gained 50 pips on a trade, and the pip value is $10, your profit would be $500. If you lost 30 pips on a trade, and the pip value is $10, your loss would be $300.
Conclusion
Counting pips is an essential skill that every forex trader must master. It is the basic unit of measurement used to calculate profit and loss in a forex trade. By understanding how to calculate pips, traders can effectively manage their risks and maximize their profits. It is important to note that the pip value varies depending on the currency pair and the lot size. Therefore, traders must always check the pip value before entering a trade. With practice and experience, counting pips in forex will become an easy and intuitive process.
