This short guide will help you to get a clear image of the notion pip in Forex. For Forex traders the process of trading is built around Forex Pips. Being a trader I quite likely could hear such quotes as Im up 20 Forex Pips for the day or I made a 200 Forex Pips profit on my last trade.
So what do we know about Forex Pips? Forex Pips abbreviation stands for percentage in point but traders often call them just like ‘points ‘. If we put straight, pip is a minor unit of the price for any currency.You can find Forex Pip in the very last decimal point of currency pairs or exchange rates.
For many currency pairs Forex Pips looks in the following way 0.0001. For example if you buy USD/CHF at 1.2475 and then sell it at 1.2489, you will have a 14 pips profit. But as usual every rule holds some exceptions the most common of them is USD/JPY. For this exchange rate there are just 2 decimal places therefore in this particular case the Forex Pip equals 0.01. The main reason, why a Forex Pip is so important, is the fact that Forex Pips give the basis for calculation of all profits or losses incurred in all Forex trade deals.
Forex Pips and its value
The most important thing for any trader is to understand the real value of a Forex pip in the the market full of diverse currency pairs and constantly fluctuating prices. Luckily, the formula is relatively simple. For example there are currency pairs that base USD as the currency in this case you just need to divide the Forex pip (0.0001) with the current exchange rate and you will get the Forex Pips value. It makes things easier if currency pairs have USD as the quote currency.
So in the above example, in case exchange rate for the USD/CHF is 1.2489, this should mean the following result for a trader: 0.0001 / 1.2489 = 0.0000800704. As you can see, this is a very small number. Nevertheless you should always keep in mind that you could leverage reasonably good amounts of your investments to move relatively much larger quantities of actual currency. Let’s say, you can use the leverage to generate huge profits off this apparently small number.
Let’s say your broker gives you the option to trade Forex with a leverage of 100:1. This would mean that to purchase a standard lot of $100,000 you would need to invest $1,000 only, of your own money. Keeping this in mind, you should be able to easily visualize to what effect trading in much larger lots can affect its Forex pip value, and thus your eventual profit or loss.
In case you trade a small sum of $1,000 only in currency, you should calculate the Forex pip as follows: 0.0000800704 X 1000 = $0.08 per pip. Therefore, the price would need to immensely rise before you can even start to make a reasonable profit at the given rate. In general terms, the 14 Forex pips would only make a minor profit of $1.12 for you.
Otherwise, if you use the advantage to actually buy a big lot of $100,000 as your base, overall increase in your profits would be as 0.0000800704 X 100,000 = $8.01 per pip. This is the way to get a much higher profit when computed to $112.14. Doe it sound like a real business now?.
The calculations value of some others Forex Pips
In case you want calculate the value of a Forex pip in currency terms, multiply each pip with its lot value EURUSD pip = 0.0001 X 100,000 = $10.00
- EURUSD pip = 0.0001 X 10,000 = $1.00
- USDCHF pip = 0.0001 X 100,000 = SFr 10.00
- USDCHF pip = 0.0001 X 10,000 = SFr 1.00
If you want to convert a pip to its base currency, divide it by the exchange rate.
- Say EURUSD exchange rate = 1.4750 = $10.00 / 1.4750 = EUR 6.78
- Say USDCHF exchange rate = 1.1015 = $10.00 / 1.1015 = $9.08
JPY also works on the same principal, but with a second decimal place.
Can you rely on Forex robots? Yes and no at the same time. If you think that your robot is going to provide you with trades, as well as tell you when to go or out of the market, depending on some algorithm, it’s better to forget this idea.
But if you are a trader with an efficient system, you simply need an automated method to base your system on. Yes, it is quite possible in this case to automate your Forex trading, as long as you are perfectly certain that you already have a truly profitable system in your hands.
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