What does PIP mean in forex trading?
Have you ever heard the acronym “pip” before? Pip is the acronym for “percentage in point”. A pip is the smallest price move that an exchange rate can make based on what is happening in the market. Currency pair traders will buy or sell a currency whose value is expressed in relationship to another currency. A pip is one of the most basic concepts of currency pair trading.
To make it simple, a trader who wants to buy the USD/CAD pair would be purchasing US Dollars and simultaneously selling Canadian Dollars. On the other hand, a trader who wants to sell US Dollars would sell the USD/CAD pair, buying Canadian dollars at the same time. If traders use the term “pips” it often refers to the spread between the bid and ask prices of the currency pair.
How do you calculate pips?
When there is movement in the exchange rate, it will be measured by pips. We all know that most currency pairs are quoted to a maximum of four decimal places, so the smallest change for these pairs is 1 pip. The value of a pip is calculated by dividing 1/10,000 or 0.0001 by the exchange rate.
Pips and Profitability
We determine the movement of a currency pair by looking at whether a trader made a profit or loss from his or her positions at the end of the day. When a trader buys the EUR/USD they will profit if the Euro increases in value relative to the US Dollar. When the trader buys the Euro for 1.1835 and exited the trade at 1.1901, he or she would make 1.1901 – 1.1835 = 66 pips on the trade.
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