Updated: Aug 15
You may have heard the term 'pips' in relation to Forex Trading. Understanding the value of pips is critical in managing your money when trading…..and managing your money is the MOST important factor.
The unit of measurement to express the change in value between two currencies is called a ‘pip’
If EUR/USD (‘currency pair’) moves from 1.1050 to 1.1051, that .0001 rise in value is ONE PIP.
One pip is usually the last decimal place of a price quote. Most currency pairs go to four decimal places, however some pairs are less than this. In the example below, the number highlighted in red is the pip.
EUR / USD = 1.1234
An example of how to read pips with a currency pair is:
So how do we get the value of a pip? The monetary value of each pip depends on three factors:
· the currency pair being traded
· the size of the trade
· the exchange rate.
Based on these factors the fluctuation of even a single pip can have a significant impact on the value of the open position.
EXAMPLE (in USD)
Assume that a $300,000 trade involving the USD/CAD pair is closed at 1.0568 after gaining 20 pips. Calculate the profit in U.S. dollars by completing the following three steps: