Learn Forex Pips Secrets

Here is an useful Forex Pips Guide from a cool forex website.

When you start looking for currency exchange articles, you will quickly observe references to the forex pip. Your gains and losses will be determined in pips. another thing that is measured in pips is the spread, the difference between the bid and ask prices which is the main cost of FX trading and how the forex brokers create their money. Hence it is obviously very  significant to know what is a pip.

The word is an acronym standing for percentage in point (otherwise, price interest point). It is the least increment of changes in values. It allows us to evaluate a climb or fall in currency rates in percentage terms as an alternative of dollars and cents.

What should we use Pips instead of dollars? The logic for this is clear. In the foreign exchange market there is no world currency in which to define prices. The United States Dollar may be the most generally traded currency but it is not drawn in in all trades. If you are trading cross rates, i.e. two extra currencies such as EUR/GBP or any other pairs that does not involve USD, it would not make any sense at all to state your profits and losses in terms of United States dollars. as an alternative, we require something that is a small percentage of the value of whatever currencies we are trading with.

This means that the monetary value of a pip varies according to the currency pair. Even if you are making use of the best forex trading software you need to have a very good knowledge about pips.

nearly all currencies are quoted to 4 decimal points. For illustration you might notice the bid price for EUR/USD quoted at 1.3641 and ask price 1.3645. The change (the spread) is 0.0004 or 4 pips. In this case a pip is 0.01% of a lot.

accordingly if the lot size was $100,000, one pip would be worth $10. For a lot size of $10,000, one pip would be US$1.

That is the worth of pips when the US dollar is the quote currency, i.e. XXX/USD. But when the quote currency is different, one pip is commonly ten units of that currency (e.g. 10 euros or 10 pounds). Or if your lot size is 10,000 units, one pip is 1 unit (1 euro or 1 pound).

The Japaense Yen is an exception which has a much lower unit value than most currencies (you get a lot of yen to the dollar). For this reason of this, the yen is only quoted to the second decimal point. You might see a price USD/JPY 110.12. In this case one pip is 0.01 or 1% but in yen, not dollars. So the pip value is JPY 1000 which at that price would be worth US $11.012.

These numbers can be confusing when you are a beginner at currency trading. So it is better for beginners to trade consistently with just one forex currency pair.

When you trade in one pair repeatedly every day you will soon get used to how much a pip means in terms of your actual gains and losses in your account. You will understand how much one pip is worth in dollars or in your own currency.

But when you are are doing forex trading quite a few different currency pairs, you have to deal with pips of diverse values. If you get baffled, you could be taking greater risks than you intended or closing trades with less gains than you thought. It is much easier to deal with just one pair initially until you have a sound understanding of trading practices and forex pip values.

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