Forex Trading Pips Explained: A Complete Guide For Beginners

Published : 3 weeks ago, on 29/08/2024

Discover a complete guide for beginners on forex trading pips explained. Importantly, pips can help traders better understand potential profits and losses before they make a trade. Indeed, these values are typically measured in pips, not the actual currency. As a forex trader getting started, you must understand how pips work in forex so you can calculate their value. Whether you’re comparing broker fees on Brokerage Today or preparing a high leverage scalping trade, understanding pips will help control trading costs. This way, you can access a consistent unit to compare fluctuations across different currencies and platforms. Plus, you can better estimate profits, losses, and risks on a trade. Read on to learn about forex trading pips explained: a complete guide for beginners.

What Is A Pip?

First, you need to understand what is a pip in forex. Importantly, pips represent the smallest whole unit increment a currency pair can change. For most traded currency pairs with the exception of the Japanese yen, the pip is the fourth decimal place in the exchange rate – or one one-hundredth of a single percent. For example, say the EUR/USD exchange rate rises from 1.2040 to 1.2050. This represents a change of 10 pips. Additionally, a drop in the exchange rate from 1.2060 to 1.2040 would represent a change of 20 pips. With the Japanese yen, the pip is only two decimal places at .01 Yen. Undoubtedly, understand what is a forex trading pip explained before you make your first trade.

Pips And Pipettes

Next, it’s important tot know the difference between forex trading pips explained and pipettes before you start trading. Indeed, some forex brokers list currency pairs beyond the standard four decimal places. Here, they are listing pipettes, also called points or fractional pips. Typically, located at the fifth decimal place, a pipette is equal to one tenth of a pip. For example, say the GBP/USD currency pair exchange rate moves from 1.30563 to 1.30564. This .00001 value higher is equal to one pipette. On trading platforms, you often see this to the upper right of two larger digits on the display system in your forex brokers account. Similarly, with the Yen, the pipette is located at the third decimal place. Absolutely, understand pips vs pipettes in forex trading explained.

How To Calculate The Value Of A Pip

In addition, know how to calculate the value of forex trading pips explained. Naturally, pip values depend on the currency pair, exchange rate, and value of the trade. If your FX account is funded in USD and this is the counter currency, such as EUR/USD – the pip is fixed at .0001. Here, you can multiply your trade value (or lot size) by .0001 to get your pip value. For example, a trade of 10,000 euros on EUR/USD would have a $1 pip. If USD is your base currency such as USD/CAD, the pip value also involves the exchange rate. In this case, you multiply the trade value by the quotient of the pip size over the exchange rate. For instance, a $100,000 trade times (.0001/1.3145) equals a pip value of $7.61. In short, know how to calculate pip values in forex so you can understand your risk.

How Pips Relate To The Spread

Moreover, understand how forex trading pips relate to the spread before you make your first trade. Importantly, the spread measures the difference between the bid price and the ask price on a trade. Usually, it’s measured in pips. For example, say a broker platform lists a bid price exchange rate for EUR/USE at 1.0677. If they list the ask price at 1.0679, you just need to subtract the bid price from this value to get the spread. Here, it would be 0.0002, or two pips. Typically, you can find exchange rates for the bid and ask prices listed right on your broker platform for a given currency pair. From there, you can determine the total cost of your trade – factoring in the lot size. In short, understand forex trading pips explained and how they relate to the spread.

How To Use Pips In Forex Trading

Furthermore, know how to use forex trading pips explained as you get started trading. Once you know your pip value, you can calculate potential profits and losses on trades. For example, say you enter a long position on GBP/USD at 1.5000. If it moves to 1.5030, the price moves to 30 pips in your favor. This means you can potentially earn a profit if the trade is closed. To calculate your potential earnings, simply multiply your pip value by 30. For losses, it’s the same calculation if the price moves against you. In this case, you would potentially lose the value instead. Surely, know how to use forex trading pips explained to maximize your earnings with the largest forex brokers in the world.

There are several factors to consider in a complete guide for beginners on forex trading pips explained. First, traders need to know what is a pip before they can understand how the value affects them. Next, know the difference between a pip and a pipette in case a broker uses these fractional increments. In addition, you need to understand how to calculate the value of a pip, so you can know your profits and losses. Moreover, know how pips relate to the spread and how to use them for your trading strategies. Consider the points above for a complete guide for beginners on forex trading pips explained.