Forex/FX (Foreign Exchange)

Forex/FX (Foreign Exchange): The exchange of national currencies. The forex market is global, non- centralized and operates whenever an exchange is open anywhere around the world.

 

What is a Pip?

Pips - text

A pip is the unit of measurement to express the change in price between two currencies.

Just like a pip is the smallest part of a fruit, a pip in forex refers to the smallest price unit related to a currency. The term ‘pip’ is actually an acronym for ‘percentage in point’.

Professional forex traders often express their gains and losses in the number of pips their position rose or fell.

For example, if the EUR/USD moves from 1.2712 to 1.2713, that 0.0001 rise in the exchange rate is ONE PIP.

All major currency pairs go to the fourth decimal place to quantify a pip apart from the Japanese Yen which only goes to two.

Some brokers only quote to the fourth and second decimal place for JPY pairs but others, including AVA Trade, quote to the fifth decimal place of the currency to provide even greater accuracy when measuring gains and losses. This fifth decimal place is what we call a pipette – one tenth of a pip.

For example if the EURUSD moves from 1.27128 to 1.27129, we can say it has moved one pipette or 0.1 pips (1 tenth of a pip).

So now that we know what a pip is, what does it mean to us in terms of how much money we make or lose for each movement?

Well this depends on the size of the position we opened. Larger positions mean each pip movement in the pair will have greater monetary consequence to our balance.

To calculate this it is quite simple. We simply multiply our position size by 0.0001 (i.e. ONE PIP):

FoR example, Say we wanted to open a position size of 10,000 units.

Our calculation to establish what a one pip movement means to us is as follows:

10,000 (units) * 0.0001 (one pip) = $ 1 per pip

So a buy or sell position of 10,000 means that every time the pair moves 0.0001 (ONE PIP) then we will make a profit or loss of $1.00 depending on which way it moved.

Therefore, for a position of this size – 10,000 units – we will gain or lose $1 for every pip movement in either direction. So if the EUR/USD moves 100 pips in our direction we will make $100 profit.

This will work for any trade size, we simply calculate the trade size times 0.0001 (1 pip).