What are Forex Trading Pips?

Posted by admin On January - 28 - 2009

If you’re new to Forex you’ll be coming across a lot of jargon that possibly does mean much to you at this time. One such term you’ll here often is "pips".

"I’m up 34 pips for the day."
"My last trade made a 127 pip profit."

Great! Ahh.. What exactly are pips?

Pip is just short for "percentage in point" infact some people might just use the word points.

A pip is the smallest price unit for a currency. It’s the last decimal point for a currencies exchange rate when comparing two currencies.

Most exchange rates are expressed to 4 decimal places. For example if you bought USD/CAD 1.3275 and sold at 1.3289 that would be 14 pips profit
In this case 0.0001 represents 1 pip.

There are some exceptions. For example the USD/JPY (US Dollar/Japanese Yen) currency pair are only express to two decimal places. So 0.01 would be 1 pip.

Pips are used to calculate trading profits and loses.

As we’re dealing with fluctuating currency values, how do we calculate the value of a pip?

It’s a simple calculation.

If USD is the base currency in the currency pair then we just need to divide a pip by the exchange rate. So for example if the exchange rate for USD/CAD were 1.3275.
Caclulation as follows 0.0001 / 1.3275 = 0.000075329
That’s a very small number.

This is where leverage comes in. By using leverage you can make big profits from small numbers. For example if a broker lets you trade with a leverage of 100:1 then $100 can be used to trade $10,000 worth of currency. If one pip is worth $0.10 then by using using leverage of 100:1 each pip would be worth $10.

Using leverage to magnify potential gains also increases potential loses. This problem is solved with the use of stop loss limits. Fortunately there is an easy way to automate your trading with the use of Expert Advisors such as FAP Turbo which will trade within your stop loss limits, the idea being to maximize gains while limiting losses.

You can read more on pips, leverage and the latest Forex trading robots here.

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