Have you heard about the term “pips” in forex trading but have always wondered what it means? Scratch your head no more as you’ve come to the right place to find out about the world of pips. Right here, we are going to explore more about pips in the context of forex trading.
What Is A Pip?
Pip, an acronym for “percentage in point”, measures the smallest unit of change between two currencies in a pair. For example, if you’re trading the USD/SGD currency pair, and the price moves from 1.3625 to 1.3626, that .0001 rise in value is 1 pip.
Usually, a pip is the last decimal place of a price quote. Most currency pairs are quoted to 4 decimal places, so a pip is the fourth decimal point. In other words, a pip is the equivalent of 1/100 of 1% or 0.0001.
Some currency pairs like those quoted in Japanese yen (JPY) are in 2 decimal places, making it an exception to the four decimal place rule.
What Is A Pipette?
It’s not the pipette used in the science lab, but what’s used to name a fractional pip.
There are forex brokers that quote currency pairs beyond the standard “4 and 2” decimal places to “5 and 3” decimal places.
They are quoting fractional pips, also called “points” or “pipettes.” A pipette is equal 1/10th of a pip. For example, if GBP/USD moves from 1.30545 to 1.30546, that 0.00001 move is one pipette.
Why Are Pips Essential in Forex Trading?
Pips are important in forex trading for a couple of reasons. First, they allow forex traders to measure the movement of currency pairs. This is essential for making trading decisions and for managing risk.
Next, they are used as a way to measure a trader’s profits and losses.
When a trader buys or sells a currency pair, they are hoping that the price will move in their favour. If the price moves up in a “buy” trade, they will make a profit. But in the same trade, if the price moves down, they will make a loss.
Thirdly, pips are used to calculate risk. Forex trading uses leverage, which means that traders can control a large position with a relatively small amount of money. This can amplify both profits and losses. Before opening a trade, traders need to calculate how much they are willing to risk. This is done by using a risk management strategy, such as setting a stop order.
As the name might suggest, a stop order is an order to close a trade at a specific price to limit the amount of money that a trader can lose on a trade. Stop orders are typically placed a few pips below the entry price of a “buy” trade and vice versa. This means that if the price moves against the trader, the trade will be closed automatically, limiting the trader’s loss to a few pips.
How To Calculate The Value Of A Pip
If your forex account is funded with US dollars (which is generally the case) and USD is the second of the pair, such as with the EUR/USD pair, the pip is fixed at .0001.
Therefore, for a trade of 100,000 lots, a 1 pip movement would have bagged the forex trader a profit of $10.
But you don’t need to work all these out yourself as your forex broker would work this out for you automatically during a trade. There are also plenty of free pip calculators available online for you to calculate the pip value for various currency pairs and trade sizes.
Read Also: Candlestick Patterns: How To Read Them, And What Are Some Common Ones To Look Out For
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