Forex Terminology:
Pip:
Every trader in the Foreign Exchange ‘FOREX’ hopes to make a profit from something called ‘PIP’. It may sound silly, but gains in pips can potentially make you over wealthy .Take your time with this information, as it is required knowledge for all Forex traders. Don’t even think about trading until you are comfortable with pip values and calculating profit and loss.
What is a pip ?
Pips stands for ‘PERCENTAGE IN PIONTS’. In the Forex trading, a ‘PIP’ is a unit of measurement which represents the smallest change in the price of currency or a currency pair. In the stock markets this is a classified as a ‘POINT’. As a result, some folks refer to pips as points. Pips are the last decimal point in an exchange rate or currency pair. For the majority of currencies a ‘PIP’ is equal to 0.0001. This means that if you purchased USD/CHF at 1.2310 and sold at 1.2330, you made 20 pips .On the other hand, there are some currency pair exceptions. FOR EXAMPLE: The USD/JPY pair has only two decimal places making a pip equal 0.01. Therefore,
USD/JPY: 110.78 .01 divided by exchange rate = pip value .01 / 110.78= 0.0090269This looks like a very long number but later we will discuss lot size.
USD/CHF: 1.1227 .0001 divided by exchange rate = pip value .0001 /1.1227 = 0.0089070
USD/CAD: 1.2780 .0001 divided by exchange rate = pip value .0001 / 1.2780 = 0.0078247
In the case where the US Dollar is not quoted first and we want to get the US Dollar value, we have to add one more step.
GBP/USD: 1.9799 .0001 divided by exchange rate = pip valueSo .0001 / 1.9799 = GBP 0.0050507
But we need to get back to US dollars so we add another calculation which is
GBP x Exchange rate
So 0.00505076 x 1.9799 =0.0099998 When rounded up it would be 0.0001
Don’t worry, you don’t have to do that, but it’s really important for you to know how the Forex brokers will work this out.
For more informationsWhat is a lot ?
The value of a pip changes based upon the size of your account, because the size of your account affects how much currency you can leverage. A standard full size account is 100,000 units of the base currency. If you are trading in USD, The Value of the ‘LOT’ in the standard account is $100.000.A mini ‘LOT’ is 10,000 units of the base currency. If you are trading mini ‘LOTS’, you can leverage $10,000.This is why a pip in a mini account is worth less than a pip in a standard account. Let’s assume we will be using a $10,000 lot size. We will now recalculate some examples to see how it affects the pip value.
USD/JPY at an exchange rate of 110.78(.01 / 110.78) x $10,000 = $0.092 per pipUSD/CHF at an exchange rate of 1.1227(.0001 / 1.1227) x $10,000 = $0.98 per pip.
to learn more please click hereIn cases where the US Dollar is not quoted first, the formula is slightly different.
GBP/USD at an exchange rate of 1.9799(.0001 / 1.9799) x GBP 10,000 = 0.50 x 1.9799 = $1 per pip
How do I calculate profits and losses?
When you close out a trade, you can calculate your profits and losses using the following formula:
Price (exchange rate) when selling the base currency - price when buying the base currency X transaction size = profit or loss Assume you buy Euros (EUR/USD) at 1.2178 and sell Euros at 1.2188. If the transaction size is 100,000 Euros, you will have a $100 profit.
($1.2188 - $1.2178) X 100,000 = $.001 X 100,000 = $100
Similarly, if you sell Euros (EUR/USD) at 1.2170 and buy Euros at 1.2180, you will have a $100 loss.
($1.2170 - $1.2180) X 100,000 = - $.001 X 100,000 = - $100
You can also calculate your unrealized profits and losses on open positions. Just substitute the current bid or ask rate for the action you will take when closing out the position. For example, if you bought Euros at 1.2178 and the current bid rate is 1.2173, you have an unrealized loss of $50.
($1.2173 - $1.2178) X 100,000 = - $.0005 X 100,000 = - $50
Similarly, if you sold Euros at 1.2170 and the current ask rate is 1.2165, you have an unrealized profit of $50.
($1.2170 - $1.2165) X 100,000 = $.0005 X 100,000 = $50
If the quote currency is not in US dollars, you will have to con- vert the profit or loss to US dollars at the dealer's rate. Further, if the dealer charges commissions or other fees, you must subtract those commissions and fees from your profits and add them to your losses to determine your true profits and losses.
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