The latest trend is forex trading. You have undoubtedly seen the numerous advertisements for forex trading platforms and brokers if you use social media.
Among many other topics, you will hear forex traders discussing pips, spreads, lots, and stop-loss orders. We’re talking about pips here. To make sure you know what they are, why they are important, and how they may influence your trading choices, this article will dive down the rabbit hole.
Forex Pips 101
You may use this as your Google search term. “Price interest point” or “percentage in point” is what “pip” stands for. In forex, what are pips? It is the smallest price change a currency pair may make for easier representation.
For the majority of currency pairings, pips are typically measured to the fourth decimal place. There are certain exceptions, though. For example, in Japanese yen pairings, a pip is valued to the second decimal point.
The USD/JPY rising one pip from 146.47 to 146.48 is a simple example to visualize this. However, a move from 1.1050 to 1.1051 indicates a one pip rise if you are trading EUR/USD.
How Do Forex Pips Get Determined?
This is the thrilling part. Three factors affect pip values: the exchange rate, the lot size, and the currency pair.
For the majority of currency pairings, the fundamental formula is 1 pip = 0.0001 x lot size, measured to the fourth decimal pair. Therefore, you will receive 0.0001 × 100,000 = $10 per pip if your transaction size is 100,000 EUR/USD.
For currency pairings such as USD/JPY, the value of a single pip will fluctuate. The currency rate will be relevant in these situations. The benefit is that well-known broker platforms like Weltrade offer free pip calculators.
What Makes Them Important?
Forex pips may appear to be worthless to the average person. What difference does a 0.0001 price change make, one would wonder?
Calculating the Profit and Loss
It is the most effective method of calculating your forex deals’ profit or loss. For instance, you would have profited 20 pips if you purchased USD/JPY at 146.30 and it climbed to 146.50. However, you will lose 40 pips if you purchase the identical currency pair at 146.50 and sell it at 146.10.
Control of Risk
Pips are used by forex professionals to compute risks and profits. Pips may be used to determine your take-profit and stop-loss levels. For instance, you can place your stop-loss point 20 pips from your entry price if you are prepared to take a 20-pip blow.
Volatility Comparison
You should be aware that certain currency combinations are quite erratic. Currency pairings that are extremely volatile may fluctuate by as much as 40–50 pips. You may use this information to select currency pairings that complement your trading approach.
You will trade highly volatile currencies if you follow a high-risk, high-reward trading strategy.
Concluding remarks
A forex pip may be thought of as the lifeblood of forex trading. Despite their little size, their combined impact has the power to make or break your deals. You may improve your approach and confidently navigate the choppy waters of forex trading by understanding what pip values represent and how to apply them.
Also Read: Blockchain Technology: A New Frontier in Forex Trading?
