In Forex trading, the Pip (percentage in point) is a very important measure of price movement. It is the smallest increment of price possible and is used to calculate profits and losses. In this guide, we will answer common questions about Pips and provide some useful tips on how to use them effectively in your Forex trading strategy.
What Is a Pip?
A Pip is the smallest unit of price movement in Forex trading. One pip is equal to 0.0001 of a currency pair. For example, if the EUR/USD moves from $0.9950 to $0.9951, that is one pip of movement. Pips are used to calculate profits and losses in Forex trading.
How Are Pips Used in Forex Trading?
Pips are used to calculate profits and losses in Forex trading. When you open a trade, you will need to specify the size of your position in pips. For example, if you buy 1000 units (called a micro lot) of EUR/USD at $0.9950 and place a stop loss at $0.9930, you have risked 20 pips.
If the EUR/USD price reaches your stop loss at $0.9930, you will lose 20 pips x 1000 units = $200. If the EUR/USD price moves in your favor and hits your take profit target at $0.9970, you will make 20 pips x 1000 units = $200.
The value of a pip varies depending on the currency pair that you are trading and the size of your position (the number of units that you have bought or sold). The pip value is also affected by the current exchange rate and the interest rates of the currencies involved in the trade.
For example, if you are trading EUR/USD and have a position size of 1000 units (a micro lot), each pip is worth $0.01. If the price moves from $0.9950 to $0.9951, your profit will be:
1000 (units) x 0.0001 (one pip) x $0.01 (pip value) = $0.01
If you move your stop loss to breakeven at $0.9950, your risk will be reduced to zero and your potential profit will be locked in.
Pips can also be used to calculate losses in Forex trading. For example, if you sell 1000 units of EUR/USD at $0.9950 and place a stop loss at $0.9970, you have exposed yourself to a risk of 20 pips. If the price hits your stop loss at $0.9970, you will lose 20 pips x 1000 units = $200.
The pip spread is the difference between the bid and asks the price of a currency pair. The bid price is the price that you can sell a currency pair at and the asking price is the price that you can buy a currency pair at. For example, if EUR/USD has a bid price of $0.9950 and an asking price of $0.9951, the spread is one pip.
Pip Value Calculator
You can use a pip value calculator to calculate the value of a pip in your preferred currency. Simply enter the size of your position and the current exchange rate to find out the value of each pip.