Forex Trading - Understanding Pips
- Percentage in Point. The Smallest Unit of Price for a Currency

Online Currency Trading - Understanding Pips

Forex Trading - Understanding Pips - Percentage in Point. The Smallest Unit of Price for a Currency

To forex traders, everything revolves around pips.

"I'm up 35 pips for the day."

"I made a 127 pip profit on my last trade."

That's great, but what's a pip?

Pip is short for "percentage in point" and you may sometimes hear people refer to pips as points.

Put simply, a pip is the smallest unit of price for a currency. It's the last decimal point in every exchange rate or currency pair.

For most currencies its 0.0001. So if you bought USD/CHF 1.2475 and sold at 1.2489 you made 14 pips.

One common exception is USD/JPY. In this currency pair there are only two decimal places so a pip is equal to 0.01.

The reason pips are so important is because they are the basis for calculating profit or loss.

Pip Value

With all these different currency pairs to deal with and with prices fluctuating all the time, how do you know the value of a pip?

It's a simple calculation. For currency pairs in which USD is the base currency, just divide a pip (usually 0.0001) by the exchange rate.

For currency pairs in which USD is the quote currency, its even simpler. The pip value is always one pip (for example, 0.0001).

So in our example above, when the exchange rate for USD.CHF is 1.2489:

0.0001 / 1.2489 = 0.0000800704

That's a pretty tiny number. But remember that in forex trading you are able to leverage small sums of money to move large quantities of currency.

In other words, you can use leverage to make big profits off of that tiny number.

Let's say your broker allows you to trade with leverage of 100:1. This means that in order to buy a standard lot of $100,000, you only need to put up $1,000.

You can see how trading in larger lots affects the pip value, and therefore your profit or loss:

If you are only trading $1,000 in currency, the pip value is calculated as follows:

0.0000800704 X 1000 = $0.08 per pip.

The price would have to go up by a whole lot of pips in order to make a significant profit at that rate. That 14 pip profit only made you $1.12.

But by using leverage to buy a lot size of $100,000 your profit increases.

0.0000800704 X 100,000 = $8.01 per pip.

That's a profit of $112.14. Now you're talking.


Browse Categories:
Stock Trading
Forex Trading
Commodity Trading
Options Trading
Day Trading
Technical Analysis
Real Estate Investing
Bonds Investing
Finance / Economics
For Your Trading Room
Online Forex Trading Tips
  Currency Trading  
  Introduction to Forex  
  Reading Forex Quotes  
  Understanding Pips  
  Types of Forex Orders  
  Understanding Margin and Leverage  
  Avoiding Failure in the Forex Market  
  Calculating Profit and Loss  
  Choosing a Forex Broker  
  Forex Trading vs The Stock Market  
  Forex - Fundamental Analysis  
  Technical Analysis  
  Fundamental vs Technical Analysis  
  Traits of Successful Forex Traders  
  More About Forex Trading...  
Online Commodity Trading Tips

Commodity Trading

  Intro to Commodities - Part 1  
  Intro to Commodities - Part 2  
  Commodity Exchanges  
  Financial Indexes  
  Commodity Types  
  Reading Commodity Prices  
  Commodities - Margins  
  Commodities - Leverage  
  Trading Coffee  
  Trading Silver  
  Trading Uranium  
  Trading Soybean  
  Trading Oil  
  More About Commodities Trading...  
Online Options Trading Tips

Online Options Trading

  Options 101  
  Calls and Puts  
  Options Trading 101  
  Options Trading 102  
  Options - Risk Management  
  How To Read Options Listings  
  Trading Strategies - Basic Concepts  
  Trading Strategies - Profit and Risk  
  The Greeks - Part 1  
  The Greeks - Part 2  
  Values and Prices - Part 1  
  Values and Prices - Part 2  
  More About Options Trading...  
Real Estate Investing
  Real Estate Investing  
  Getting Started in Real Estate  
  Questions To Ask Before Investing  
  Real Estate - Your First Time  
  Finding and Evaluating Property  
  Inspections Save You Money  
  Cheap Repairs, Big Profits  
  Keep Your Cash For A Rainy Day  
  Insurance and Risk Management  
  Managing Risk - Part 1  
  Managing Risk - Part 2  
  More About Real Estate Investing...