What is a Pip in Forex Trading? How to Calculate the Value of a Pip?
The pip is a basic concept of forex trading as movements of currency pairs are measured by pips. A pip measures the price move in the exchange rate. They are usually referred to as profits or losses. Understanding how pips work helps traders to enter and exit their trades successfully, besides managing their trading strategy well.
So, what is a Pip?
The pip is the standardized measuring unit for the change of value in a currency pair. It is usually the last decimal point in the price quote and is equivalent to one basis point. A pip stands for percentage in point or price interest point.
A pip represents the smallest changes in exchange rates and is typically used in calculating profits and losses in forex trading.
How Pips Work in Forex Market.
The pip in forex currency pairs is represented by the fourth decimal point in most currency pairs. Except for the Japanese Yen pairs, which are quoted only by two decimals.
Pips movements are used to determine the profit and loss for each trade. For instance, if a trader bought the GBP/USD pair at 1.4050 and exited at 1.4130, then the total profit will be 80 pips (1.4130-1.4050). But in the case of selling the EUR/JPY pair at 120.00 and the trade was closed at 120.20, then the total loss will be 20 pips.
How to Calculate the Value of a Pip.
The value of each pip depends on three main factors; the currency pair, the lot size, and the exchange rate.
The value of a pip is calculated by dividing 1/10,000 or 0.0001 by the pair’s exchange rate, and by dividing 1/100 by the exchange rate for the Japanese Yen pairs.
Let’s say a trader bought EUR/USD at 1.1250 and closed the trade at 1.1300. How many pips were earned then? Yes, right! 50 pips.
Now to calculate the pip value if the trade amount was 20,000 euros. (1) Multiply the trade amount (20,000) by 0.0001 = 2, it is the number of USD per pip. Now (2) divide the number of USD per pip by the exchange rate at which the trade was closed: 2÷1.1300= 1.76 euro per pip. The final step is to (3) multiply the number of pips by the pip’s value: 50×1.76= 88 euros.
Another simple way is to divide one pip by the current price of the forex currency pair and multiply that number by your lot size.
What is a Pipette?
Some forex brokers quote currency pairs by additional decimals to 5 and 3 decimals beyond the standard of 4 and 2 decimals. A pipette is also known as points or fractional pips. Pipettes or fractional pips are used to precisely define fluctuations in forex rates. Every pipette is equal to a tenth of the pip. For example, if the pair EUR/USD moves from 1.12501 to 1.12502, then the pair rose by one pipette.
How Many Pips Traders Make per Day?
There is no specific number of pips you can make on a daily basis, that will depend on your technical analysis or fundamental analysis, your trading strategies, and how the market moves. The more you stick to your trading rules, innovate new strategies, and practice proper risk management techniques, the more pips you can make.
Spread Calculation.
The spread is defined as the difference between the bid and ask price of a currency pair. That is usually measured in pips, the smallest unit of price movement. Spread is typically calculated by subtracting the bid price from the ask price.
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