When trading Forex, the most common jargon you will hear among your trading friends is PIPS. “Hey, I made 35 PIPS today.” “Oh, I lost 22 PIPS yesterday.” “Yes, I made 122 PIPS last week.”
A pip is the smallest price movement on the charts. It is the last decimal place to which a particular exchange rate is usually quoted. The Pip is how you measure your profit or loss.
For example, if you saw this:
1 dollar = 1.1017 Australian dollars
So for this currency pair, 1 pip means AUD 0.0001.
If USD/AUD goes from 1.1017 to 1.1018, that is a ONE PIP increase.
Now let’s say this happens:
On Tuesday at 20:00, USD/AUD = 1.1017 On Wednesday at 20:00, USD/AUD = 1.1044
This represents a move of 27 pips.
1.1044 – 1.1017 = 0.0027 = 27 PIPS
Most currencies have four decimal places, so 1 pip equals 0.0001 for these currencies. A notable exception is USD/JPY, which has two decimal places. For example:
USD/JPY = 108.48
So for this pair, 1 pip would be 0.01
If the USD/JPY moves from 108.48 to 108.34, this represents a move of 14 pips.
108.48 – 108.34 = 0.14 = 14 PIPS
Now here comes a key question: How do you make profit?
If the direction of the market moves as you have speculated, you PIPS. If the market moves in the opposite direction that you have speculated, you lose PIPS.
Example 1: You speculate that the market is going to go up and you click buy (long position).
If the market goes up and you come out at a higher price, you earn PIPS. If the market goes down and you exit at a lower price, you lose PIPS.
Example 2: You speculate that the market is going to go down and you click sell (short position).
If the market goes down and you exit at a lower price, you earn PIPS. If the market goes up and you exit at a higher price, you lose PIPS.
Now comes another question: How much money is a pip worth?
Different currency pairs have different pip values. Here are the pip values for the 4 major currency pairs.
EUR/USD: 1 pip = $10 USD (fixed)
GBP/USD: 1 pip = $10 USD (fixed)
USD/CHF: 1 pip = $8.3 USD (approx.)
USD/JPY: 1 pip = $9 USD (approx.)
Now you will notice that some currencies have fixed pip values while others have rough pip values. Whenever USD is quoted as the counterparty currency, 1 pip is always equal to $10 USD. But when you have other currencies as counterparts, the pip value will vary depending on the existing exchange rate. Let me explain…
In Forex, every time you make a profit, you always make the profit in the opposite currency. For example, for USD/JPY, you make profits in yen (not USD). And so, to convert it back to US dollars, it is again subject to the existing exchange rate. That is why the pip value will vary from time to time. The good news is that if you use our trading platform, you don’t have to do any calculations. Everything is automatically calculated for you.
All you have to do is click buy or sell and all the numbers will be generated for you on the platform. Isn’t that great?
