If you are a forex trader, everything is usually about pips. For example, you might say, "I am up 35 pips for the day," or, "I made 127 pips on my last trade."
Although this sounds like a lot of fun, it would probably be helpful to explain what a pip actually is.
"Pip" stands for "percentage in point." Sometimes, people also refer to pips as "points." Basically, a pip is the smallest price unit for a currency. It is the last decimal point in every exchange rate or currency pair.
For most currencies, this means a pip is 0.0001. Therefore, if you bought USD/CHF 1.2475 and sold at 1.2489, you made 14 pips.
However, there are exceptions. One is USD/JPY. This currency pair only has two decimal places so that a pip is equal to 0.01.
Pips are very important because they are the basis by which a profit or loss is calculated.
What is a Pip Value?
Even when you utilize different currency pairs and deal with fluctuating prices, the pip usually remains the same. If the USD is the base currency, you divide the pip (which is usually 0.0001) by the exchange rate. If the USD is the quote currency, the pip value is always just one pip, such as 0.0001.
Therefore, if the exchange rate for USD.CHF is 1.2489, it goes like so:
0.0001 / 1.2489 = 0.0000800704
That probably seems like a small number, but remember that with forex trading, you can leverage small sums of money to move large amounts of currency. Therefore, it is entirely possible to make a profit off of such a small number.
For example, if your broker lets you trade with leverage of 100:1, you only need to put up $1000 to buy a standard lot of $100,000. You can see that trading in larger lots boosts the pip value so that your profit or loss is also affected, like so:
If you trade on $1000 in currency, your pip value is calculated thusly:
0.0000800704 X 1000 = $0.08 per pip.
This means that you have a profit of $112.14; not bad.
By the way... With forex trading, you don't invest in a single company or group of companies as you do with stocks or mutual funds, for example. Instead, you're investing in a particular national economy. You are pinning hopes on one nation's economic health versus that of another.
Therefore, fundamental analysis is very important. When trading currencies you need to know about the countries economic situation.
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