What are pips

Описание: When you start trading Forex, one of the terms you’ll often hear is pips. This concept is essential for measuring price movements in the market and calculating your profits or losses. But what exactly are pips, and how do they work?

A pip is the smallest unit of measurement that represents a change in the price of a currency pair. Traditionally, a pip corresponds to the fourth decimal place in most currency pairs. For example, if the price of EUR/USD changes from 1.1234 to 1.1235, the movement is 1 pip.

In some pairs where prices are smaller, such as USD/JPY, a pip corresponds to the second decimal place. For example, if the price changes from 110.25 to 110.26, the movement is also 1 pip.

Why are pips important?

Pips are used to measure:

Price movements:
They help you quantify how much a currency pair's value has changed over time.

Profits or losses:
In Forex, profits and losses are calculated in pips. For instance, if you bought EUR/USD at 1.1200 and sold it at 1.1250, you earned 50 pips.

Trading costs:
The spread, which is the cost of trading in Forex, is also measured in pips. For example, if the spread for EUR/USD is 2 pips, this is the cost of entering a trade.

How to calculate pip value

The value of a pip depends on your trade size and the currency pair being traded. For example, in a standard lot size of 1 lot (100,000 units) for EUR/USD, 1 pip equals $10 USD. In smaller trades, like 0.1 lots (10,000 units), 1 pip equals $1 USD.

For pairs involving other currencies, like GBP/JPY, you need to convert the pip value to your account currency based on the current exchange rate.

Pips and fractional points (pipettes)

Today, many brokers offer prices with 5 decimal places instead of 4. The fifth decimal is called a pipette or fractional pip, and it represents one-tenth of a pip. For example, if the price changes from 1.12345 to 1.12346, the movement is 0.1 pips.

Summary

Understanding pips is essential for Forex trading since they form the basis for measuring price movements, calculating costs, and determining profits or losses. Mastering this concept will help you manage your trades more effectively and make informed decisions in the market.