Forex trading is a complex and dynamic market where traders use a variety of tools and techniques to make profitable trades. One of the most important concepts in forex trading is the forex point. In this article, we will explain what a forex point is, how it is calculated and how it is used in forex trading.
What is a forex point?
A forex point, also known as a pip, is the smallest unit of measurement for a currency pair. It is used to measure the change in the value of a currency pair, and is expressed as the fourth decimal place in a currency quote. For example, if the EUR/USD currency pair is trading at 1.1234, the fourth decimal place (0.0001) is the forex point.
How is a forex point calculated?
Forex points are calculated using the following formula:
Forex point = (change in price / exchange rate) x 10,000
For example, if the EUR/USD currency pair goes from 1.1234 to 1.1235, the change in price is 0.0001. If the exchange rate is 1.1234, the forex point would be:
(0.0001 / 1.1234) x 10,000 = 0.89
This means that the forex point for the EUR/USD currency pair is 0.89.
How is a forex point used in forex trading?
Forex traders use forex points to calculate their profits and losses on trades. When a trader buys a currency pair, they are hoping that the value of the base currency will increase relative to the quote currency. If the value of the currency pair goes up, the trader makes a profit. If the value of the currency pair goes down, the trader makes a loss.
For example, if a trader buys the EUR/USD currency pair at 1.1234 and sells it at 1.1244, they have made a profit of 10 forex points. If the trader had bought 1 lot of the currency pair (which is equal to 100,000 units), their profit would be:
10 x $10 (the value of 1 forex point for 1 lot of EUR/USD) = $100
Similarly, if the trader had bought the EUR/USD currency pair at 1.1234 and sold it at 1.1224, they would have made a loss of 10 forex points. If the trader had bought 1 lot of the currency pair, their loss would be:
10 x $10 = $100
Forex traders can also use forex points to calculate their risk and reward on trades. For example, if a trader is willing to risk 50 forex points on a trade, they can set a stop-loss order at a level that is 50 points away from their entry price. If the trade goes against them and the currency pair reaches the stop-loss level, the trader will exit the trade with a loss of 50 forex points.
Conclusion
Forex points are a crucial concept in forex trading. They allow traders to measure the change in the value of a currency pair, calculate their profits and losses on trades, and manage their risk and reward. Understanding how forex points are calculated and used in forex trading is essential for any trader who wants to succeed in the forex market.
