Forex trading involves the buying and selling of currencies with the aim of making a profit. In order to make accurate trades, it is important to understand the concept of pips. Pips refer to the smallest price movement that a currency pair can make. In this article, we will explore how to know pips in forex trading.
What are Pips?
A pip is the smallest price movement that a currency pair can make. It is also known as a percentage in point or price interest point. In most currency pairs, a pip is the fourth decimal place of the exchange rate. For example, if the exchange rate for the EUR/USD currency pair is 1.1234, a pip movement would be from 1.1234 to 1.1235.
However, some currency pairs have different pip values. For example, the Japanese yen is quoted to two decimal places. In this case, a pip movement would be in the second decimal place. For example, if the exchange rate for the USD/JPY currency pair is 108.85, a pip movement would be from 108.85 to 108.86.
Why are Pips Important?
Understanding pips is important in forex trading because it determines the profit or loss made on a trade. The value of a pip depends on the size of the position and the currency pair being traded. For example, if a trader buys 1 lot of EUR/USD, which is equal to 100,000 units of the base currency, a pip movement would be worth $10. However, if the trader buys 1 lot of USD/JPY, which is equal to 100,000 units of the quote currency, a pip movement would be worth 1000 yen, which is approximately $9.
To calculate the value of a pip in a currency pair, the following formula can be used:
Pip value = (0.0001 / exchange rate) x trade size
For example, if a trader buys 1 lot of EUR/USD at an exchange rate of 1.1234, the pip value would be:
Pip value = (0.0001 / 1.1234) x 100,000 = $8.90
This means that for every pip movement in the EUR/USD currency pair, the trader would make or lose $8.90 depending on the direction of the trade.
Reading Pip Values on a Trading Platform
Most forex trading platforms display pip values for currency pairs. The pip value is usually displayed next to the exchange rate or can be found in the trading calculator on the platform. It is important to note that the pip value may differ depending on the trading platform and the broker used.
Pips play a crucial role in forex trading as they determine the profit or loss made on a trade. Understanding pips and how to calculate their value is essential for making accurate trades. Traders should also be aware of the pip value for the currency pairs they are trading and should ensure they are using a reliable trading platform and broker. By mastering the concept of pips, traders can improve their chances of making profitable trades in the forex market.