Familiarizing yourself with the idea of “pips” is vital for honing your trading strategy in forex. A pip stands for “percentage in points,” and it represents the smallest change in a currency, or the precision at which a specific currency is quoted. Jumping into the forex market without first understanding the concept of pips may greatly affect your ability to make calculations on profit and loss when trading currency pairs. Many beginner traders make mistakes by creating orders without first grasping the fundamentals of pip. However, one important first step to becoming a successful forex investor is to understand pips and how to calculate their value.
The Ultimate Guide to Counting Pips in Forex
Are you wondering just just how much is one pip in forex? Well, one pip is roughly equal to 0.0001 for many currencies, with the exception of the Japanese Yen, which uses only two decimal places (with 0.01 representing one pip). You can determine the value of a pip for a specific trade by dividing one pip (0.0001) by a currency pair’s exchange rate and multiplying it by your trade’s lot size. Another simple way to count pips in forex is to take advantage of your trading platform’s built-in features to auto-measure movements and calculate your profits and losses. The following step-by-step guide outlines how to calculate pips in forex by using two different methods: automatic and manual.
Method 1: Manual Way to Calculate Pips
- Check the Pip Value of the Currency Pair
As explained in the intro, a pip usually refers to the fourth decimal place 0.0001 for most currencies, with the exception of JPY, which uses the second decimal place to represent a pip.
- Calculate the Pip Value in Your Account’s Currency
A pip value = (one pip/exchange rate)*lot size. For example, for a standard US dollar/Canadian dollar of lot size 100,000 with an exchange rate of 1.2829, the pip value can be calculated by dividing 0.0001 by 1.2829 and multiplying the result by 100,000. That’s (0.0001/1.2829)*100,000 = $7.79 per pip.
- Calculate Your Profit or Loss
You can calculate your profit or loss by multiplying the number of pips lost or gained by the figure calculated in the previous step. For instance, if a forex trader makes a 20-pip profit on USD/CAD pair, they can calculate their profit by multiplying 20*$7.79, which is equal to $155.80.
Method 2: How to Calculate Pips By Using a Trading Platform’s Tools
Many forex trading platforms, like Weltrade, have tools to auto-calculate pips. You can use a forex trading platform’s features to calculate pips by simply measuring the distance. Once you select the tool, click on your entry price and drag to the exit price. You will see the actual number of pips displayed directly. Some forex platforms’ pip-calculating tools can determine profit or losses by reading the lot size and the number of pips.
To sum up, a pip is the smallest unit by which forex currency exchange rates are expressed. For example, for a Euro/US Dollar pair (EUR/USD) currency pair with the quote 1.2345, the figure “5” represents one pip. A pip is sometimes called “percentage in points” because it vividly reflects a standardized percentage change in the rate. The significance of pip in forex trading includes easy profit and loss calculation, better risk management, and volatility assessment. Hopefully, by following this ultimate beginner’s guide to counting pips in forex, you can make well-informed trading decisions and gain a more comprehensive understanding of exchange rate movements.
