If you are a regular forex trader, you may have heard about pips in forex. When a beginner starts trading, generally he becomes familiar with the basic terminology of foreign exchange trading.
The Concept of Pips in forex:
Foreign exchange or forex trading is the activity of buying and selling of currencies. It is done with the help of a brokerage firm. Profit is made from the changes in exchange rates. To do forex trading properly, you should know about the terms and techniques which are used in forex market. You should choose an efficient and experienced broker as well. Online forex channels, videos tutorials and forex books can offer assistance in this field.
In the forex market, pips (price index points) are number value. The value of currency is given in pips. 1 pip is considered the smallest price exchange. 1 pip is equal to the number, 0.0001 and 2 pips are equal to 0.0002. Currencies are generally traded up to 4 decimals. Only Japanese Yen currencies are shown to 2 decimal places.
Why is Pip Important in Forex?
Pips in forex are the smallest units of price traded for currencies. They are often used in algorithm and machine based formulations.
Different currencies have different price interest points. This difference happens because of the type of pairs of currencies that are being traded. It also depends on the fact which market they are working in and how the currencies are paired. There are many reasons which make them important in foreign exchange.
- Pips make the traders aware how a market works.
- The pips are used to identify the rise and fall of different values in the foreign exchange market.
- Pips are the basic form of measurement through which a trader’s profit or loss is measured.
- If the traders can make more positive points, they can make more profit.
How to Calculate Pips in Forex?
It is an important question which may arise in your mind. Let’s check the way of calculating pips. If a trader buys one currency, he must also sell another currency. Currency pairs represent prices. The U.S./Euro currency pair is the most active currency pair in trading. If the currencies are active, the difference between the ask price becomes smaller. Foreign exchange market is different from the stock market because there is no broker fee to pay. If the pip spread is low, it is easy to make profit. Pip spread is not at all guaranteed, if the forex market fluctuates all the time.
What is spread? Spread is the difference between buy and sell prices of the currencies. Brokers set the value. These values are known as ask or bid price. It means these are the prices which the brokers offer to buy and sell currencies to a forex trader.
As you can understand, pips in forex trading are very important. So, do research on this topic to make your conception. Even though I gave an idea about pips, you should read about them from other sources as well.