Pips play a crucial role in forex trading, as they help traders measure the profit or loss of their trades. In simple terms, a pip is a unit of measurement used to express the change in value between two currencies. The value of a pip depends on the currency pair being traded and the size of the trade. In this article, we will explore how to use pips in forex trading.
What is a pip?
A pip is the smallest unit of measurement in forex trading. It stands for “percentage in point” or “price interest point”. It represents the fifth decimal point in most currency pairs, except for the Japanese yen pairs, where it represents the third decimal point. For example, if the EUR/USD pair moves from 1.1015 to 1.1016, that is a one pip movement.
The value of a pip is determined by the currency pair being traded, the size of the trade, and the exchange rate. For example, if the EUR/USD pair is trading at 1.1015, and you buy 1 lot (100,000 units) of the pair, then the value of one pip would be $10. However, if you trade 0.1 lots (10,000 units) of the same pair, then the value of one pip would be $1.
How to calculate the value of a pip?
To calculate the value of a pip, you need to know the following formula:
(Pip value) = (0.0001 / Exchange rate) * Lot size
For example, if you are trading the EUR/USD pair at an exchange rate of 1.1015, and you want to buy 1 lot (100,000 units) of the pair, then the value of one pip would be:
(0.0001 / 1.1015) * 100,000 = $9.08
This means that for every one pip movement in the EUR/USD pair, you would make or lose $9.08, depending on whether you are buying or selling the pair.
How to use pips in forex trading?
Pips are used in forex trading to measure the profit or loss of a trade. When you enter a trade, you need to set a stop loss and a take profit level. The stop loss is the price level at which you want to exit the trade if the market moves against you, while the take profit is the price level at which you want to exit the trade if the market moves in your favor.
To set these levels, you need to use pips. For example, if you are buying the EUR/USD pair at 1.1015 and you want to set a stop loss at 1.1005, that means you are willing to risk 10 pips on the trade. Similarly, if you want to set a take profit at 1.1035, that means you are targeting a profit of 20 pips on the trade.
It is important to note that the size of your trade will affect the value of the pips. For example, if you are trading 0.1 lots of the EUR/USD pair, then the value of one pip would be $1. Therefore, if you are targeting a profit of 20 pips, that means you are aiming to make $20 on the trade.
Conclusion
Pips are a crucial aspect of forex trading, as they help traders measure the profit or loss of their trades. They are used to set stop loss and take profit levels, and to calculate the value of a trade. Understanding how to use pips effectively can help traders improve their trading performance and manage their risk more effectively.
