The word ‘pip’ is such a tiny word but carries so much weight when it comes to measuring your overall profit or losses in trading. Pip in forex trading is the most essential thing just as saving your investment from loss is very crucial.
Without pips, it is hard to find how exchange rates are changing that can affect your trade. And also, it will alert you to manage your risk factors better. However, many such traders are still in confusion as to how pip works in forex trading.
In this article, we discussed what pip means and how you can find your pip value to determine your market position.
Know your pip in forex trading
A pip is the most common term in forex trading that represents the basic unit of measure used for trading currencies. The full form of pip is “percentage in point”.
A USD/EUR quote of 0.7737 means that you can buy 0.7737 euros for US$1. A one pip increase in this quote will change this value to 0.7738. It shows that US dollar value would shift according to any value change in euros.
A pip value is shown in the fourth decimal place of this currency pair that defines the overall change in the currency quote of an exchange rate. This will direct you to either buying or selling stocks in trading. Here, a change of 1 pip is noticed when the value rises from 0.7737 to 0.7738.
The 2 keys to determine pip value
The pip value is very important when it comes to identifying the total profit or loss factors in your forex trade. The position size or change in the exchange rate can influence the pip value. So, knowing your pips is necessary to find in which direction your trade is moving.
You can easily find your market condition in trading by calculating the pip value using the two formulas:
- Total profit/loss = Value of pip x Amount of pips
- Value of pip = (0.0001 / Exchange rate) * Position size
These formulas are the basic way to calculate pip in forex trading.
Pips can affect your leverage
Your borrowed leverage amount that you are using in your trade is often at risk. More leverage involved in your trading makes you vulnerable to risk your position. Measuring pip in forex trading will cut many such risks that may hinder your progress.
Losing a few pips from your account can entirely end your full trading balance. If you use your full cash to trade, then any sudden decrease in forex prices can make you go penniless instantly. On the positive side, when you gain in more pips then you would quickly profit with 100% return of the invested amount. It is recommended that you should risk a minimum amount of leverage to control any damage that may take place.
A little change in pip value can impact your trading either negatively or positively. Thus, some good strategies must be followed before placing your trade. Following up on pips is one common technique to know where you are heading.
You must have a clear idea by now about the importance of pip in forex trading. Without having any knowledge about pip, you will quickly drown in the river of your loss and may never come back. It is a must for all beginners to be well-informed about pips.
The forex market has more technical concepts that every trader may not know yet. Pips are the starting point from where you should begin your research into the forex world.