Forex trading is a complex financial market where traders buy and sell currency pairs with the aim of making a profit. In order to be successful in forex trading, traders need to understand the various concepts and terminologies used in this market. One of the most important terminologies in forex trading is pips. In this article, we will explain what pips are in forex trade and how they are used in trading.
What are Pips in Forex Trading?
Pip stands for percentage in point, which is the smallest unit of measurement used in forex trading. It is the fourth decimal point in a currency pair, except for the Japanese yen, where it is the second decimal point. For example, if the EUR/USD currency pair is trading at 1.1234, the fourth decimal point (0.0001) is called a pip.
Pips are used to measure the change in the value of a currency pair. They are the standard unit of measurement for calculating profits and losses in forex trading. When the price of a currency pair moves up or down, it is measured in pips.
For example, if the EUR/USD currency pair moves from 1.1234 to 1.1235, it has moved one pip. If it moves from 1.1234 to 1.1244, it has moved ten pips.
How are Pips Used in Forex Trading?
Pips are used in forex trading to calculate the profit or loss of a trade. When a trader opens a position, they will set a stop loss and take profit level. The stop loss is the maximum amount a trader is willing to lose on a trade, while the take profit is the desired amount of profit they want to make.
For example, if a trader buys the EUR/USD currency pair at 1.1234 and sets a stop loss at 1.1224 and a take profit at 1.1244, they are risking 10 pips to make 10 pips. If the price moves in their favor and reaches 1.1244, they will make a profit of 10 pips. If the price moves against them and reaches 1.1224, they will lose 10 pips.
The value of each pip depends on the size of the position and the currency pair being traded. Most forex trading platforms have a pip calculator that can be used to calculate the value of a pip for a particular currency pair and position size.
For example, if a trader buys one lot (100,000 units) of the EUR/USD currency pair at 1.1234 and the price moves to 1.1244, they will make a profit of $10 (assuming a pip value of $1). If they buy five lots (500,000 units), they will make a profit of $50 for the same price movement.
Pips are also used to calculate the spread, which is the difference between the bid and ask price of a currency pair. The spread is usually measured in pips and represents the cost of trading for the trader. The lower the spread, the cheaper it is to trade.
Conclusion
In conclusion, pips are an important concept in forex trading. They are the smallest unit of measurement used to calculate the change in the value of a currency pair. Pips are used to calculate profits and losses, as well as the spread. Understanding pips is essential for forex traders who want to be successful in this market.
