Know the term PIP in Forex
Posted By Paddy on June 6, 2009
When you start finding info on forex websites online, you will immediately see references to the currency trading pip. Your profits and losses will be measuredin pips. another thing that is considered in pips is the spread, the difference between the bid and ask prices which is the foremost cost of foreign exchange trading and how the brokers create their wealth. There are numerous useless automated forex software out there. Even if you are using a genuine automated forex system you should know the meaning of PIP. So it is unmistakably very crucial to understand what is a forex pip.
The term PIP represents Percentage in Point (or sometimes, price interest point). It is the least increment of changes in currency rates. It allows us to determine a rise or drop in currency values in percentage terms as a replacement for of dollars and cents.
Why is it necessary to talk inpips? The explanation for this is clear. In the currency trading market there is no common currency in which to state values. The US dollar may be the most commonly traded currency but it is not involved in all currency trades. If you are are doing currency trading cross rates, i.e. two other currencies such as EUR/GBP or any other combination that does not contain USD, it would not make any sense at all to express your profitsand losses in terms of US $. As a replacement for, we want something that is a small percentage of the value of whichevercurrencies we are doing the trade with.
This means that the monetary worth of a pip varies according to the currency pair.
nearly all currencies are quoted to 4 decimal points. For example you might notice 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. Here a pip is 0.01% of a lot.
hence if the lot size was $100,000, one pip would be worth USD10. For a lot size of $10,000, one pip willbe USD1.
These numbers can be confusing when you are just starting out. Therefore it is better to start trading regularly with just one forex pair. We suggest you to read the forex pip tutorial to learn more.
Should you trade in one pair steadily 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 make out how much one pip is worth in dollars or in your own currency.
But if you are doing currency trading a number of different currency pairs, you have to deal with pips of numerous values. If you get baffled, you could be taking greater risks than you intended or closing trades with less profit than you thought. It is much easier to deal with simply one pair in the starting until you have a sound knowledge of trading practices and forex pip values.
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