Forex Trading

In the forex world, Pip stands for Percentage In Point and is used to describe the smallest denominator or increment on the currency market. In most markets a pip is valued at 0.0001 (four decimal places) except for the Japanese Yen which is valued at two decimal places (0.01).

Confused yet?

Well think of it in everyday terms. When you go to the grocery store, the smallest possible piece of money you can hand over is 1 cent. There cannot be anything smaller then that. Same thing goes for the grocery store owner, he can only price things at 1 cent or go up in 1 cent increments.

So now we have the basics. Lets have an example! Say you entered the currency marketed trading euro's when the market rate was 1.2134. You wait a while and then sold on those euro's for 1.2144. In the currency exchange world we would say you have made 10 pips, or up 10 pips. Obviously because 1.2144 - 1.2134 = 0.0010.

Your probably thinking you've seen numbers like 1.2144 in your life before. And you would be right! Think about every night when you watch the evening news. They are expressing the currency rates in pips. Atleast now you will know what they are talking about!

So we know what a forex pip is, but we cant exactly brag to our mates that we are 10 pips up can we! Well luckily pips have a very good use. In the most basic of uses, they can be used to calculate profit on a foreign exchange trade. We commonly use the expression :

Pips Made x $(Initial Investment) = $(Profit)

So if we then switch that into real world money terms. Lets say we invested $10,000 into any currency. And we made 15 pips gain before we sold our trade.

0.0015 x $10,000 = $15

If you play around with these numbers a bit you will realise that if your initial investment is $10,000 (Which is a common amount when in the currency market), then for every pip gained, you will gain $1.

It doesnt sound like an awful lot does it. But you have to remember over time, and with big investment. We can get alot of these "Pip" movements happening.

Read Users' Comments (0)