What is a Pip and What Does It Represent?
New traders in the forex market must take a deep look at the idea of “a percentage in point” or “price interest point”—which is abbreviated as “pips” in forex terms. It’s a unit of change in an exchange rate of a currency pair.
Pips—a fundamental term in forex trading
A pip means the fluctuation of the value between two currencies, and normally it is the last decimal place of a price quote. The major currencies are traditionally priced to four decimal places, and a pip is one unit of the fourth decimal point: for dollar currencies this is to 1/100th of a cent.
According to Investopedia, we can summarize “pips” as:
1.Forex currency pairs are quoted in terms of 'pips', short for percentage in points.
2.In practical terms, a pip is one-hundredth of one percent, or the fourth decimal place (0.0001).
3.Currency base pairs are typically quoted where the bid-ask spread is measured in pips.
Pips—An Example
For instance, if a trader wants to buy the USD/GBP pair, he or she would be purchasing US Dollars and simultaneously selling Great Britain Pound. Conversely, a trader who wants to sell US Dollars would sell the USD/GBP pair, buying Great Britain Pound at the same time. Traders often use the term "pips" to refer to the spread between the bid and ask prices of the currency pair and to show profitability of any trade.
To be more specific, if EUR/USD moves from 1.2600 to 1.2601, then the .0001 USD increase in value is one pip. As we just saw for EUR/USD, it is 0.0001. That is to say a pip is more commonly referred to as 1/100th of 1%.
How to Calculate Pips?
Counting pips can be tricky. Modern forex traders can benefit from many ready-made trading tools and online tutorial courses. There are a lot of forex brokers providing online “pip value calculator”, in which traders can calculate the value of a pip in the currency you want to trade in.
The interface of those “calculators” is made for every trader, and it’s pretty easy to use. All you need to do is fill in following information:
1. Currency Pair
2. Lot sizes
3. Leverage
4. Account Currency
This calculation outcome is important to determine if a trade is suitable for your risk management. Even for the most experienced forex traders.
Understanding Your Profit and Loss
To know if the trade has profits, we have to understand whether we were long or short.
Long position:
In the case of a long position, if the prices move up, it will be a profit, and if the prices move down it will be a loss.
Short position:
In the case of a short position, if the prices move up, it will be a loss, and if the prices move down it will be a profit.
Let’s take a look of this chart:
Assume that you have a 100,000 GBP/USD position now. If we had a short GBP/USD position and the prices moved up by 20 pips, it would be a loss of $200. If the prices moved down by 30 pips, it would be a $300 profit.
| 100,000 GBP/USD | Long position | Short position |
|---|---|---|
| Prices up 20 pips | Profit $200 | Loss $200 |
| Prices down 30pips | Loss $300 | Profit $300 |
Before you make your investment decisions, feel free to reach out professional account managers at MOGA FX. MOGA offers 24-hour personalized client support based on your preferences and needs.
Disclaimer:
Trading Foreign Exchange Currency Pairs carries a high level of risk to your capital. These derivatives may not be suitable for all investors.