Learn about Forex Pips. A Tutorail
Here is an first-rate Forex Pips tutoral from a cool forex website.
When you begin researching for currency trading site online, you will quickly spot references to the currency trading pip. Your gains and losses will be considered in pips. Something else that is measured in pips is the forex spread, the variation between the bid and ask prices which is the major cost of FX trading and how the forex brokers create their money. Hence it is clearly highly important to learn what is a forex pip.
The term PIP represents Percentage in Point (otherwise, price interest point). It is the least increment of changes in rates. It allows us to evaluate a climb or fall in currency values in percentage terms as a substitute of dollars and cents.
Why do we need to talk in pips? The purpose for this is clear. In the forex market there is no universal currency in which to state rates. The USD may be the most commonly traded currency but it is not involved in all trades. If you are are doing currency trading cross rates, i.e. two additional currencies such as EUR/GBP or any other grouping that does not involve USD, it would not make any sense at all to state your profits and losses in terms of USD. Instead, we require something that is a small percentage of the value of whatever currencies we are doing the trade with.
This means that the financial rate of a pip varies according to the currency pair. Even if you are utilizing the best forex software you have to have a sound knowledge about pips.
nearly all currencies are quoted to 4 decimal points. For illustration you might see the bid price for EUR/USD quoted at 1.3641 and ask price 1.3645. The difference (the spread) is 0.0004 or 4 pips. In this case a pip is 0.01% of a lot.
therefore if the lot size was $100,000, one pip would be worth US dollar10. For a lot size of $10,000, one pip would be US$1.
That is the value of pips when the US $ is the quote currency, i.e. EUR/USD , GBP/USD etc. But if the quote currency is changed, one pip is usually ten units of that currency (e.g. 10 euros or 10 pounds). Or in case 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 usually quoted to the second decimal point. You might notice a price USD/JPY 110.12. In this instance 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 figures can be confusing when you are just starting out. So it is better to start trading regularly with just one forex currency pair.
When you trade in one pair regularly daily you will soon get used to how much a pip means in terms of your actual profits and losses in your account. You will identify how much one pip is worth in dollars or in your own currency.
But when you are trading quite a few different currency pairs, you have to deal with pips of numerous values. If you get confused, you could be taking bigger risks than you intended or closing trades with less gains than you thought. It is much easier to deal with only one pair initially until you have a sound knowledge of trading practices and forex pip rates.
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