Pips forex is a term that is commonly used in the foreign exchange market. Pips are the smallest unit of measurement for currency pairs in the forex market. Pips are used to measure the change in value between two currencies. In this article, we will explain what pips forex is, how they are calculated, and how they are used in forex trading.
What are Pips Forex?
Pips forex is an acronym for “percentage in point.” It is the smallest unit of measurement used in the forex market to measure the change in value between two currencies. Pips are used to calculate the profits or losses made in forex trading.
For example, if the EUR/USD pair is trading at 1.1200 and then it rises to 1.1250, the change in value is 50 pips. Currency pairs are usually quoted to four decimal places, with the exception of the Japanese yen, which is quoted to two decimal places.
How are Pips Calculated?
Pips are calculated by taking the difference between the opening and closing prices of a currency pair. The formula for calculating pips is as follows:
Pips = (Closing Price – Opening Price) x Lot Size
The lot size refers to the number of units of a currency that are being traded. For example, if a trader buys one lot of the EUR/USD pair, which is equal to 100,000 units, then the lot size is 100,000.
Pips are usually calculated automatically by forex trading platforms, and traders can easily see how many pips they have gained or lost on a trade.
How are Pips Used in Forex Trading?
Pips are a crucial part of forex trading because they are used to calculate the profits or losses made on a trade. Traders use pips to determine the risk-to-reward ratio of a trade and to set stop-loss and take-profit levels.
For example, if a trader buys the EUR/USD pair at 1.1200 and sets a stop-loss at 1.1150, they are risking 50 pips. If the trade goes in their favor, they can set a take-profit at 1.1300, which would give them a profit of 100 pips. The risk-to-reward ratio in this case would be 1:2, meaning the trader is risking 50 pips to potentially gain 100 pips.
Pips are also used to calculate the spread, which is the difference between the bid and ask prices of a currency pair. The spread is usually measured in pips, and it is the cost of trading forex. For example, if the bid price of the EUR/USD pair is 1.1200 and the ask price is 1.1202, the spread is 2 pips.
Conclusion
Pips forex may be a small unit of measurement, but they play a crucial role in forex trading. Pips are used to calculate the profits or losses made on a trade, to determine the risk-to-reward ratio, and to set stop-loss and take-profit levels. Understanding pips is essential for any forex trader who wants to be successful in the market.
