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Forex PIP trading is one of the most popular trading forms with investors. PIP, which is called price interest point or percentage in point, is the smallest possible movement, that the exchange rate can make. Currency pairs in most cases are quoted to four decimals. The Japanese yen among them is an exception and the information about understanding trading through Japanese yen will be covered in another part of the topic. The fourth number after the decimal point is typically what traders call the “pips”. Every point that place in the quote moves is 1 pip movement. For example, if the EUR/USD rises from 1.6796 to 1.6798, the EUR/USD currency pair has risen 2 pip.
In this guide, you’ll get more information about Forex pips, what is Forex pip indicator, how they work, and what are its quirks.
Forex Pips Explained
A Pip is the basic unit of measurement or value when a currency pair moves. This may be the greatest source of confusion all across the globe. Let’s get a Forex pip example and take currency pairs like EUR/USD. What you will see inside of your FX dealer’s platform is a quote and it will look something like this 1.2901. A pip is the basic unit of measurement that we talk about in the world of currency trading and it is the fourth number after the decimal place on most currency pairs. So, in that case, the pip will be number 1, and if that moves from 1.2901 to 2.9000, it means that we moved one pip down, because we went from 1 to 0.
What’s more, you may see on the FX trading dealers’ platforms the fifth decimal, the fifth number after the dot, at the very edge of the quotes. A lot of people referring to this as a pipette, which is a smaller pip and it’s a fraction of that. They can be seen at the Forex pip value table, where there are given all the currencies with their pips. So, while you see USD/EUR, GBP/EUR, AUD/USD, and so on you’ll always their pips either. Through pips, the traders can get profits and evaluate whether it is worth it to trade with certain currency pairs or not. And every single moment, you’ll see the fourth number at the currencies, remember that they are called pips.
Depending on the information above and how the pips work in the FX market it should be said, that pip for Forex trading and success while operating in the mentioned market has a significant role.
In contrast, this all changes, if we’re looking, at the Japanese Yen with one of the major currencies pair, for example, USD/JPY, this quote is going to have a different set of numbers. If the current quote is 106.91. The second number after the decimal place, in this case, is called the pip. And if we see, that there is one more additional small number after the number 1, for instance, 106.917, the number 7 will be the pipette. So if we move from 106.91 to 106.92 it will look like that we’ve moved 1 pip up.
How do Pips Work?
After understanding Forex pip meaning, it’s time to see how they work. As we already mentioned pips are the fourth number after the decimal and in more technical terms it is one-hundredth of one percent. For calculating the pips, it’s necessary to observe exchange rate movements and changes. Most of the currencies are quoted to a maximum fourth decimal place.
Pips, in other words, are the spreads between the bid and ask prices of the currency pair. It supports traders with the information, how much gain or losses they get from the trade.
As we already mentioned above, one exception among the major currencies and their quotation is the Japanese Yen, which is quoted in 2 decimal places. So, while seeing the Forex pip chart, traders have to remember that the above-mentioned currency pair is quoted in 2 decimals and the second number after the dot is the pip.
What are the Pipettes?
As we already mentioned above, after the fourth decimal place the fifth one, the fifth decimal is called the pipettes, in the case of the Japanese yen pairs, it’s the third decimal. This one is confusing to a lot of traders and that’s not a full pip, that’s a fraction. That’s a tenth of a pip and it’s called a pipette. In fact, when you pull up an order window with your broker, the pip will be the last large number and the pipette will be the smaller number off to the side.
Usually, the pipettes are the fractional pips and also are called points. For instance, if GBO/USD moves from 1.25463 to 1.25464, that 0.00001 USD moves higher is one pipette.
How to Determine Pip Value?
For determining the pip value, traders need to take consider three main factors, including the traded currency pairs, trade size, and the rate of exchange. The above-mentioned factors affect the fluctuation of even a single pip. Considering the existing fluctuations traders can open their positions and start Forex pip trading. For determining the pip value you need to take three steps. Let’s take an example and say that trading with the currency pairs like USD/EUR through the size of $300 000 is closed at 1.0467 after gaining 20 pips. For calculating the profit in U.S. dollars traders need to take three following steps.
Firstly, you need to determine the number of the quote currency (EUR) each pip represents. For this calculation, you need to multiply the trade size to 1 pip. More concrete, considering our example it will be 300 000 x 0.0001, which is 30 EUR per pip.
After that, traders need to calculate the number of the main currency, in this case, the USD per pip. At first, you need to divide the number of EUR per pip by the closing exchange rate. This supports you to get the number of USD per pip. According to our example, it will be like this: 30 divided to 1.0467, which is approximately 28.66 USD per pip.
The next step is to determine the pip value and therefore the total profit or losses you can get through the following trading. You need to multiply the number of pips gained, by the value of each pip in USD. So it will be 20 x 28.66, which equals $573.2. So the estimated profit from the trading will be USD 573.2.
The Link Between the Leverage and the Pip Value
As we already mentioned above there are many factors, that affect the pip value. One of those factors and indicators is the amount of leverage. Firstly, it should be said, that a standard Forex account provides traders with the units of the Forex pips and lots. A lot represents the minimum quantity of a certain instrument, which can be traded, while the pips are the smallest number, which indicates the possible changes in the exchange rate.
The leverage, which defines the potential amount of profit influences the pip values, while pip values don’t define the amount of the leverage. In most cases, the leverage, which is offered by the brokers while Forex trading, equals 100:1. This means that the broker requires traders to have a minimum of $1 on their account for every $100 transaction. In general, the more leverage you are accepted, the riskier and jeopardizing your action are while trading Forex. Forex leverage is divergent through the brokers. Leverage gives traders a chance to be a part of the largest global market. Forex leverage pip allows traders to get plenty of opportunities to raise their gains and profits through the risks they take.
Gold Trading in Forex
Gold trading in Forex is one of the popular things among traders. Gold trading can be conducted in several ways and the most basic way is to buy physical gold. Because of its manufacturing cost, usually, golds are more expensive than currencies and that’s one of the main reasons why investors prefer to trade with Gold in Forex and see plenty of benefits.
In the forex world, as we already mentioned, pips have a significant role. This role is maintained while trading with gold, either. Forex gold pip varies through the brokers and mostly, brokers are offering the $0.01 pip cost on gold. This means, that traders can gain or lose $0.01 on every $100 trading.
For understanding the gold signals traders can get daily updates about the mentioned instruments exchange rates and analyze whether it worth it to trade through gold or not.
Gold trading is possible through CFDs as well. Contracts for Differences is the contract between to parties buyer and seller. While trading through CFDs traders don’t buy them directly. In this way, traders are participating in the price movements and speculating through the market’s volatility. The symbol for the gold CFD is XAU. The gold, in most cases, is traded in the pair of the USD. So, when traders see that the XAU/USD pair is going down, they’re selling their CFDs. And when the mentioned pair’s price is going to increase, traders are usually buying it to get more profit.
Forex Pip Strategy
While trading Forex, traders are usually generating their own strategies, which leads them to successful trading. Through strategies, they can determine step by step what are the actual steps to take for gaining as much as possible.
There are several Forex pips strategies for Forex pip trading, which are oriented on the gains. One of the most popular of the mentioned strategies is the 10 pips a day Forex scalping strategy. The main idea of the mentioned strategy is that traders set the goal to make a profit of 10 pips each day. The more the number of the profited pips, the better is for the trader for gaining. money. However, while gaining pips, it’s always better to consider the risk and reward ratio. For gaining 10 pips a day, traders are usually, risking nine times the potential reward. The market, which is unstable and volatile doesn’t guarantee traders that the trade will always go successful, so investors need to take into account the risks they are taking.
10 pips a day strategy is possible, however, things don’t go all the time in the way you want and that’s one of the most challenging things while trading Forex.