What are forex pips and why are they important? In this blog post, I will explain the concept of pips in forex trading and how they affect your profits and losses.
What is a Pip in Forex?
A pip is the smallest unit of price change in a currency pair. It stands for “percentage in point” or “price interest point”. A pip is usually equal to 0.0001 for most currency pairs, except for those involving the Japanese yen, where a pip is 0.01.
For example, if the EUR/USD exchange rate moves from 1.1800 to 1.1805, it means that it has increased by 5 pips. Similarly, if the USD/JPY exchange rate moves from 110.00 to 109.95, it means that it has decreased by 5 pips.
Pips are important because they determine how much money you make or lose when you trade forex. To calculate your profit or loss in pips, you need to know two things: your position size and your pip value.
Your position size is the amount of currency you buy or sell in a trade. It is usually measured in lots or units. For example, if you buy 10,000 units of EUR/USD, your position size is 10,000 EUR.
Your pip value is the amount of money you gain or lose for each pip movement in the exchange rate. It depends on your position size and the currency pair you trade. To calculate your pip value, you need to divide your position size by the exchange rate and multiply by the pip size.
Example
For example, if you buy 10,000 units of EUR/USD at 1.1800, your pip value is:
(10,000 / 1.1800) x 0.0001 = 0.8475 USD
This means that for every pip increase in the EUR/USD exchange rate, you will make 0.8475 USD in profit. Conversely, for every pip decrease in the EUR/USD exchange rate, you will lose 0.8475 USD.
To calculate your total profit or loss in pips, you need to multiply your pip value by the number of pips the exchange rate has moved in your favor or against you.
For example, if you buy 10,000 units of EUR/USD at 1.1800 and sell them at 1.1820, your total profit in pips is:
(1.1820 – 1.1800) / 0.0001 = 20 pips
Your total profit in USD is:
20 x 0.8475 = 16.95 USD
As you can see, pips are essential to measure your trading performance and manage your risk. By understanding how pips work, you can improve your forex trading skills and achieve your goals.
