Things you need to know about the basic Forex term PIP
The concept of Pip is very important 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 are going to determine your stop loss and take profit in terms of pips. So, without having a strong knowledge of this simple term pip, you will never be able to trade the market with strong confidence.
To make things easier, we are going to 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 1 pip. Most pips are 4 decimal places and that is the last place of the decimal quotation. Except for the Japanese Yen pair, which has 2 decimal places.
There is also a fractional pip, which is also known as a pipette. This is when the last of the decimals is placed on 3 or 5 decimal places. Like 1.51002 to 1.51003, the last decimal is put on the 5 potion, it is one pipette.
How to find out a Pip value
For example, imagine that you are 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 have to follow these steps.
First, you have to multiply the amount of trade by 1 pip to find the number of CAD for each pip. Here, the amount is 300,00 USD and the 1 pip is .0001
So, the multiplication is
300,000*.001=30 CAD per Pip
Second, use the closing rate, here it is 1.0568, to divide the answer to find the USD per Pip.
So, the calculation 30/1.0568=28.39 USD per Pip
Lastly, just multiply the amount of the pip you have gained from the trade, your pip is 20 at this trade 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 are buying the dollar and selling 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 in terms of pips in the Forex market.
Remember, the amount of pip, 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 most important part of your Forex trading is your Pip movement or Pip changing. If pip changes to a smaller digit when it is closed then it was 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 each pip, 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 size is small, you can take the trades with a small risk. Though your profit factor will be low, still you will be in a stress-free trading environment. While trading the market, never expect that you will be making money from a particular trade. Be prepared to deal with the losing trades.