If you are steadfast on taking up online forex trading business, I would recommend that you must get your hands on very sound fundamentals about Pips. For an ardent trader involved in global forex trading, the day starts with setting out the target for the Pips and the day ends with ascertaining his Pips balance sheet. I will try to guide you in learning the basics of Pips. It is essential that you must do sufficient math work to understand Pips to get a clear insight on Pips.
What is meant by Pips?
- Well, I would say that Pip is nothing but a fancy name for ‘Point’. Technically speaking, Pip is the smallest increment or decline in the value of the exchange rate. In a much simpler way, you can understand Pip as the last decimal point of any exchange rate. Pip is the acronym for Percentage in Point.
- An illustration of EURO/USD exchange rate of 1.5582 will make the things much better. In this exchange rate the next incremental value would be 1.5583 and the next decline value would be 1.5581. Mathematically the difference is 0.0001 and in forex jargon it is said that the exchange rate has increased or decreased by 1 Pip.
- You must be aware that rates of most of the currency pairs are expressed up to four decimal points except USD/JPY where it is expressed in two decimal points.
- Let us delve further into Pips by considering a fictitious buy/sell trade of EURO/USD. You are expecting that the value of EURO would appreciate in relation to USD. You have decided to buy EURO/USD. Your buy trade is executed at 1.5582. Your speculation turns in your favor and after some time EURO/USD appreciates to 1.5600. You make up your mind to lock the profit and sell EURO/USD. Your sell trade is executed at 1.5599. The difference between buy and sell values is equal to 0.0017. You have gained a profit of 17 Pips. What exactly is 17 Pips in USD terms? Well, we will see it in the next topic.