Forex trading is all about making profits by buying and selling currency pairs. A pip (percentage in point) is the smallest unit of measurement for the change in the value of a currency pair. Understanding how to count pips is essential for every forex trader as it helps in calculating their profits or losses accurately. In this article, we will explain in detail how to count pips on forex.
What is a pip?
A pip is the fourth decimal place in a currency pair, except for the JPY pairs, which have only two decimal places. For example, if the EUR/USD currency pair moves from 1.2500 to 1.2501, this is a one-pip movement. Similarly, if the USD/JPY currency pair moves from 112.00 to 112.01, this is also a one-pip movement.
How to calculate pips?
To calculate pips, you need to understand the decimal place value of the currency pair you are trading. Most currency pairs have four decimal places, but some have two (e.g., USD/JPY). Here’s how to calculate pips for both four and two decimal places:
Four decimal places
For currency pairs with four decimal places, the calculation is straightforward. You subtract the opening price from the closing price and then multiply that difference by the lot size. Here’s an example:
Let’s say you bought 1 lot of EUR/USD at 1.2500 and sold it at 1.2600. The difference between the two prices is 0.0100 (1.2600-1.2500). Multiply this difference by the lot size (100,000), and you get 1000. This means that you made 1000 pips on your trade.
Two decimal places
For currency pairs with two decimal places, the calculation is slightly different. You need to divide the difference between the opening and closing prices by the exchange rate and then multiply that by the lot size. Here’s an example:
Let’s say you bought 1 lot of USD/JPY at 112.00 and sold it at 113.00. The difference between the two prices is 1.00 (113.00-112.00). Divide this difference by the exchange rate (113.00) to get 0.0088. Multiply this by the lot size (100,000), and you get 880. This means that you made 880 pips on your trade.
Why is understanding pips important?
Understanding pips is important because it helps traders calculate their potential profits or losses accurately. For example, if you know that a currency pair moves an average of 100 pips per day, you can set your stop loss and take profit levels accordingly. You can also use pips to calculate your risk-reward ratio, which is essential for managing your trades effectively.
Counting pips is an essential skill that every forex trader should master. It helps traders calculate their potential profits or losses accurately and manage their trades effectively. The calculation of pips is straightforward, but it depends on the decimal place value of the currency pair you are trading. By understanding pips, traders can make informed decisions, set their stop loss and take profit levels, and manage their risk-reward ratio effectively.