Beginner forex traders often get confused about the term ‘pip’ in forex trading. What is a pip in forex? This guide will give you some useful information about it.
Knowing More about the Term ‘Pip’ in Forex Trading
The currencies you can trade in forex are available as currency pairs. Each currency pair will have their own price value, followed by five decimals. For instance, the value of EUR/USD in the forex market today is around 1.05215. It means that the value of the Euro currency is around USD 1.05215 in the forex market.
The measurement for the pip begins at the fourth decimal displayed in the value of any currency pairs in the forex trading market, which is 1 in this example of the EUR/USD value. Here’s the breakdown for this example:
- The value of EUR/USD is 1.05215, so the measurement for the pip will begin at 1 (the fourth decimal for this price value).
- The number 5 at the end of the EUR/USD value will be equal to 0.5 pip, because it is 1/10 of a pip or often called pipette.
- Next, the number 2 will be equal to 20 pips in this example.
- The number 5 in the middle will be equal to 500 pips.
- Then, the number 1 at the start will be equal to 10,000 pips.
- So, the EUR/USD value of 1.05215 will be equal to 10,000 pips + 500 pips + 20 pips + 1 pips + 0.5 pips, and the total will be 10,521.5 pips in this example.
Please note that you will use pips in your forex transactions to determine the profits and losses in your forex trading activities, so you have to understand this well. Also, the value of each pip will differ depending on the currency pairs you are trading.
Pips and Your Forex Trading Profitability
The pip is the standard measurement you will use to determine the value of each currency pair, as well as how the value increases or decreases from time to time. For most currency pairs, one pip would equal to 0.0001 of the base value, so you can measure the increase and decrease of each currency with more ease. For instance, let’s say that you are buying 100 EUR/USD pairs with the value of 1.05215 today. Then, the value of the EUR/USD pair increases by 20 pips later in the day. How much do you calculate your profit?
In this example, the value for EUR/USD has increased to 1.05235. You have bought 100 EUR/USD for this transaction, so your profit will be 2,000 pips, which is equal to 0.2 USD for this transaction. Please note that the use of pips is important in forex trading because the value increase or decrease for each currency pair is often quite tiny, which is also the reason forex traders often buy currency pairs in bulk to ensure bigger profits for them.
The Japanese Yen Uses Two-Decimal Pips
The value of 1 pip in most currency pairs in the forex trading platform is equal to 0.0001 of the base value of the currency pairs. However, there is one exception to that. The Japanese Yen (JPY) uses the pip value that equals 0.01 of its base value. So, you will get the value of 1 pip that is equal to 0.01 of the base value if you are trading in currency pairs that involve JPY (Japanese Yen)
This is something that you need to keep in mind, as it might confuse some new forex traders. Remember, Japanese Yen (JPY) is one of the most traded currencies in the forex trading market. So, by knowing about the difference in calculating the pip value for the Japanese Yen currency, you can understand more about how to calculate your profits and losses when you trade with currency pairs that involve JPY in them.
Important Points You Need to Know about Pips in the Forex Trading Platform
Pips are an important part of forex trading, and you can’t find this type of measurement in other online trading types. You don’t use pips for stocks, bonds, or cryptocurrencies, but you will need to use pips for forex trading. The reason is that pips will allow the forex trading platforms to measure the price movements of the currency pairs in the forex market, which often happens in small increments. Here are some important points you need to know about pips in the forex trading platform:
- Each forex transaction will net the forex broker a certain amount of pip. Aside from being used to measure the profits and losses for the forex traders, pip is also useful to determine the amount of profits forex brokers will get for each forex transaction. In each buy and sell transaction on the forex trading platform, you can see how much the forex broker will earn by looking at the spread value for each transaction, measured in pips.
- You will measure your profits and losses using pips. Forex traders need to know about pips and how to calculate pips because you will need to measure your profits and losses using pips. The more pips you earn for each trade, the better.
- Each price movement for the currency pairs will use pips for an easier measurement. Using pips in the forex trading market will make it easier for both forex traders and brokers to track the price movements for the currency pairs in the forex market. By using pips, you don’t need to deal with the complex decimals in your forex trading activities.
- The value of pip will differ depending on the currency pairs. Each currency pair will have different values of pips. The value of pips can be higher or lower depending on the currency pairs you are trading. Currency pairs that have strong monetary values will often have higher pips value in the forex market.
You have learned about the term ‘pip’ in forex trading and how you can measure your profits and losses with it. Pip is an important concept in the forex market, which can make it easier for you to measure small price movements for each currency pair. Without this feature, measuring the price movements will be difficult to do, as it will involve using many decimals. Thus, it’s important for forex traders to understand about pips in forex trading and how they can use it in their forex trading activities.