If you work in the Forex market, know how to analyze the information provided on the current situation on the currency exchange, you must have come across the term pips. So what is it?
What does pip mean?
Pips are used as a definition in price movement changes at minimum values. That is, it is an accepted unit of exchange rate versus value. The term originated from the abbreviated combination of two English words “percentage” and “point”. Therefore, a pip is measured as a percentage of 1/100 and allows you to catch the minimum fluctuations in changes in quotes.
The cost of currency in Forex is determined by the number of decimal places. Such numbers are difficult to perceive, so a pip was determined. It is considered from the fourth digit after the decimal point. This remains the standard concept for all participants in Forex trading, which allows traders to communicate without further explanation. Without standard items, it is impossible to make a precise definition of value when it comes to large amounts of funds.
Why do you need a pip?
The main function of this value is to help the trader to quickly assess the changing situation in the market so as not to get into a loss.
In order to do this, the trader needs to be able to read the pips values and transfer their specific money equivalent. To determine the value of 1 pip, there is a special formula: 1 point = 0.0001 course value x deal size (lot).
How it works:
• You need to know the value of 1 pip.
• Trading EUR / USD, we decided to close a deal for 100 thousand euros.
• Calculate the value of the lot using the above formula and get 100,000 x 0.0001 = $ 10.
• If you buy a pair at a price of 1.1655, and close the position at 1.1666, you will receive a profit of 1 pips or $ 10.
What does trading on short trades mean?
Working with pips in this case allows you to quickly predict the price movement by 1-2 points, and have time to close positions in profit.
The ability to read and understand the values of pips, allows novice traders to accurately estimate the possible profit. Even with small deposits, this strategy allows you to make a profit. Getting to know this unit at Forex trading is one of the important steps to become a professional trader.