Pip
Every trader in the Foreign Exchange ‘FOREX’ hopes to make a profit from something called ‘PIP’. It may sound silly, but gains in pips can potentially make you over wealthy .Take your time with this information, as it is required knowledge for all Forex traders. Don’t even think about trading until you are comfortable with pip values and calculating profit and loss.
What is a pip ?
Pips stands for ‘PERCENTAGE IN PIONTS’. In the Forex trading, a ‘PIP’ is a unit of measurement which represents the smallest change in the price of currency or a currency pair. In the stock markets this is a classified as a ‘POINT’. As a result, some folks refer to pips as points. Pips are the last decimal point in an exchange rate or currency pair. For the majority of currencies a ‘PIP’ is equal to 0.0001. This means that if you purchased USD/CHF at 1.2310 and sold at 1.2330, you made 20 pips .On the other hand, there are some currency pair exceptions. FOR EXAMPLE: The USD/JPY pair has only two decimal places making a pip equal 0.01. Therefore,
USD/JPY: 110.78
.01 divided by exchange rate = pip value
.01 / 110.78= 0.0090269This looks like a very long number but later we will discuss lot size.
USD/CHF: 1.1227
.0001 divided by exchange rate = pip value
.0001 /1.1227 = 0.0089070
USD/CAD: 1.2780
.0001 divided by exchange rate = pip value
.0001 / 1.2780 = 0.0078247
In the case where the US Dollar is not quoted first and we want to get the US Dollar value, we have to add one more step.
GBP/USD: 1.9799
.0001 divided by exchange rate = pip value
So .0001 / 1.9799 = GBP 0.0050507
But we need to get back to US dollars so we add another calculation which is
GBP x Exchange rate
So
0.00505076 x 1.9799 =0.0099998 When rounded up it would be 0.0001
Don’t worry, you don’t have to do that, but it’s really important for you to know how the Forex brokers will work this out.
