When you do Forex trading, the most common lingo you'll hear among your trader friends is PIPS. "Hey, I made 35 PIPS today." "Oh, I lost 22 PIPS yesterday." "Yes, I made 122 PIPS last week."
A pip is the smallest price movement in the charts. It's the last decimal place to which a particular exchange rate is usually quoted. The Pip is how you measure your profit or loss.
For example, if you were to see this:
USD 1 = AUD 1.1017
Then for this currency pair, 1 pip means AUD 0.0001.
If the USD / AUD goes from 1.1017 to 1.1018, that is an increase of ONE PIP.
Now let's say this happens:
On Tuesday 8pm, USD / AUD = 1.1017 On Wednesday 8pm, USD / AUD = 1.1044
This represents a 27 pip move.
1.1044 – 1.1017 = 0.0027 = 27 PIPS
Most currencies have four decimal places, so 1 pip equals 0.0001 for these currencies. A notable exception is the USD / JPY, which has two decimal places. For example:
USD / JPY = 108.48
So for this pair, 1 pip would be 0.01
If the USD / JPY moves from 108.48 to 108.34, this represents a 14 pip move.
108.48 – 108.34 = 0.14 = 14 PIPS
Now here comes a key question: How do you make a profit?
If the market direction moves as you have speculated, you make PIPS. If the market moves in the opposite direction as you have speculated, you lose PIPS.
Example 1: You speculate that the market is going to go up, and you click buy (long position).
If the market does go up and you exit at a higher price, you make PIPS. If the market goes down instead and you exit at a lower price, you lose PIPS.
Example 2: You speculate that the market is going to go down, and you click sell (short position).
If the market does go down and you exit at a lower price, you make PIPS. If the market goes up instead and you exit at a higher price, you lose PIPS.
Now comes another question: How much money is one pip worth?
Different currency pairs have different pip values. Here are the pip values for the 4 major currency pairs.
EUR / USD: 1 pip = $ 10 USD (fixed)
GBP / USD: 1 pip = $ 10 USD (fixed)
USD / CHF: 1 pip = $ 8.3 USD (approx)
USD / JPY: 1 pip = $ 9 USD (approx)
Now you will notice that some currencies have fixed pip values, while others have approximate pip values. Whenever the USD is quoted as the counter currency, 1 pip is always $ 10 USD. But when you have other currencies as the counter currency, the pip value will vary according to the existing exchange rate. Let me explain …
In Forex, whenever you make a profit, you always make the profit on the counter currency. Eg for the USD / JPY, you make a profit in Yen (and not in USD). And so, to convert it back to US dollars, you are subjected to the existing exchange rate again. That's why the pip value will vary from time to time. The good news is, if you use our trading platform, you don't have to perform any calculations at all. It's all calculated for you automatically.
All you have to do is click buy or sell, and the numbers are all generated for you on the platform. Isn't that great?