The concept of Pip is critical to learn about to improve your understanding Forex. Pip tells us the exchange value of two currencies. It is the unit that measures the exchange value of the currencies you are trading.
If you take the trades, you will determine your stop loss and take profit in terms of pips. So, without a solid knowledge of this simple term pip, you will never be able to trade the market with solid confidence.
To make things easier, we will give you a simple example. Let’s say you are trading with GBP/USD, and the movement goes from 1.5201 to 1.5202, then the .0001 USD rise is the one Pip. Most pips are four decimal places, and that is the last place of the decimal quotation, except for the Japanese Yen pair, which has two decimal places.
There is also a fractional pip, also known as a pipette. The last decimals are placed on 3 or 5 decimal places. Like 1.51002 to 1.51003, the last decimal is put on the five potions; one pipette.
How to find out a Pip value
For example, imagine trading on the Forex market with 300,000 dollars. The trade is USD/CAD, which closes by gaining 20 pips when it reaches 1.0568. To calculate whether you have made a profit or loss, you must follow these steps.
First, you have to multiply the amount of trade by one pip to find the CAD number for each Pip. Here, the amount is 300,00 USD, and the one pip is .0001
So, the multiplication is
300,000*.001=30 CAD per Pip
Second, use the closing rate, which is 1.0568, to divide the answer to find the USD per Pip.
So, the calculation is 30/1.0568=28.39 USD per Pip.
Lastly, multiply the amount of the Pipp you have gained from the trade, yourPipp is; yourPipps exchange of 300, 00 dollars, so multiply it by the amount of USD per Pip.
The answer to your loss or profit is 20*28.39= 567.80 USD profit.
The answer is in US dollars because you buy the dollar and sell the Canadian Doller. That is the answer. You profit in the dollar when you sell the Canadian dollar. For better understanding, try to know what is long and short in trading. As you gain more knowledge, you will understand how profits are made regarding pips in the Forex market.
Remember, the amount ofPipp, that your trade has gained will be used in the last step to find out your loss or profit. That is why, if your pip movement is negative, no matter how much the amount it is, it will be a negative result in the profit calculation, and you will lose money. So, the essential part of your Forex trading is your Pip movement or Pip changing. If pip changes to a smaller digit when it is closed than when opened, for example, 1.5217 to 1.5211, your pip change is negative, and you will lose money.
Determining the stop loss and take profit
Being a new trader, you might not understand why we are giving so much priority to this simple term pip. If you take the trades in the real market, you will notice that you can place a stop loss and take profit to secure your trading capital. Stop loss and take profits are determined in terms of pips. Unless you know the proper way to calculate the value of eachPipp, you will never learn to trade the market with managed risk. Unless you become good at managing your risk factor, you can never ensure the safety of your trading capital.
While taking the trades in the real market, try to trade with a small lot. If the lot is small, you can take the works with a small risk. Though your profit factor will be low, you will still be in a stress-free trading environment. While trading the market, never expect to make money from a particular trade. Be prepared to deal with the losing trades.