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Home » Education » Forex Glossary » Page 3

What Is Drawdown?

by Fxigor

Drawdown forex definition – drawdown meaning

Drawdown in the finance industry can have two meanings. Drawdown in banking refers to a gradual accessing of credit funds. Drawdown definition in forex refers to reducing equity – how much an investment or trading account is down from the peak before it recovers to the height. Drawdown and loss are not the same things. A trader can open a position, in one moment make a 2% drawdown, and then close position 3% in profit. Profitable closed positions can have a drawdown at some moment.

What drawdown teaches you?

A drawdown also helps you know how long your trading system can survive in the forex market. Your position may not be defendable if your drawdown is large.

loss and gain how to recover

For instance, an investor has to work hard to recover his capital loss if his drawdown is 50%. To secure his equity position from breaking, he will have to get a 100% profit on the remaining capital.

When a forex trader has a drawdown, the best options for him are to readjust his system and implement reasonable risk-management procedures instead of trading aggressively to recover his breakeven point. Usually, the result of the trader’s aggressive approach to recovering the breakeven point for his capital can be adverse. The reason behind it can be his emotional decisions, over trading, and using leverage even to back his account of trade.

Drawdown types

Drawdown can be an absolute drawdown, maximum drawdown, and relative drawdown. In our article absolute drawdown, we described that absolute drawdown refers to the sum difference between the initial capital risked and a minimal point below that level.

absolute drawdown

absolute drawdown formula and example

Relative drawdown is the maximal drawdown percentage that shows the ratio between the maximal drawdown and the respective local upper extremum (of equity).

Relative Drawdown = MaxDrawDown % = Max Drawdown / its MaxPeak * 100%

Maximal Drawdown = Maximum distance (Maximal Peak – next Minimal Peak)

Excessive use of Leverage

Usually, the effects of a bad trade become disastrous if leverage is used excessively by the trader. In fact, traders are unwilling to accept a losing trade or bear huge losses when they are too confident or too aggressive. According to a trading proverb, our career in a trade cannot be made by one trade but to destroy it one dreadful trade is enough’.


Conclusion

Before entering a trade, to fix a point to stop loss for that trade can be the most vital tip to follow. It will help in reducing the loss due to drawdown. Instead of making emotion-based trading decisions, you should focus on minimizing losses by using strategies to manage risk before making any exciting trades.

The majority of trades have some drawdown, even profitable trades.

Filed Under: Finance education, Forex terms

What is Leveraged Buyout LBO in Simple Words

by Fxigor

Leveraged Buyout Definition

What is an LBO
A leveraged buyout is a process when you borrow a significant amount of money to complete another company’s acquisition. Now, since the amount of loans taken for acquiring the company is pretty high, so to pay them off, the acquired company’s assets are put to use. They are often kept as collateral for the loans to the creditors. Sometimes, the acquiring company also uses its own assets to keep as collateral for the loans. Now, this buyout’s main reason is to make sure that when a company is being acquired, the acquiring company is not committing a lot of capital.

The best book to learn about LBO is: Investment banking valuation leveraged buyouts and mergers and acquisitions:

Leveraged Buyout LBO Simple explanation video

Historical aspects regarding Leveraged Buyout

The infamous history of leveraged buyouts suggests that they hadn’t been much success in the past. Most importantly, when the 1980s are kept into account, various, much important buyouts happened and led to acquired companies’ eventual bankruptcy. Mainly, this was because of the pretty high leverage ratio that amounted to almost 100%. The interest payments were also so large that the company’s operating cash flows couldn’t make it to meet the exceedingly high amounts, and thus, they eventually got bankrupted.
One of the largest LBOs on record was in 2006 when Kohlberg Kravis Roberts & Co. (KKR), Merrill Lynch, and Bain &Co. acquired the Hospital Corporation of America (HCA). The three companies had to pay a whopping amount of $33 billion to acquire HCA.

What are the reasons behind LBOs?

When a company is taking so many loans to acquire another company, it raises questions and puts the acquiring company’s finances at great risk. So, one does wonder about the reasons behind such a buyout. Well, there are three important reasons why companies come to this point.

1. The first reason is when the company wants to take over a public company and make it private
2. When someone is trying to sell a portion of his existing business for its spin-off.
3. The third reason might be the transfer of any private property or the case where a small change is to be made in the ownership of a specific business.
However, there is one common requirement that the acquired entity must be a profitable and growing venture in all cases. So, spending all the large amounts and acquiring all the loans are worth it.

Break down of LBOs
Usually, there is a ratio of 10% equity to 90% debt in an LBO. Due to the excessive ratio, usually, the bonds issued in this buyout are referred to as the junk bonds instead of the investment grade. Moreover, many people believe that the tactic of LBOs is highly predatory and ruthless because the target company never actually sanctions it. Moreover, it is pretty much ironic that the assets responsible for a company’s success are actually being used against the same company by the predator company as collateral.

The process of LBO – How does a leveraged buyout take place?
The leveraged buyouts often contain many complexities, and hence they take some time for completion. For instance, consider the example of the JAB holding company. It is a private firm that makes investments in healthcare companies, coffee, and luxury goods. In May 2016, the JAB holding company started the leveraged buyout of Krispy Kreme Doughnuts, Inc. The acquired company came at a whopping price of $1.5 billion. There was a leveraged loan of $350 million and a revolving credit facility of $150 million through the Barclays investment bank.
However, Krispy Kreme Doughnut Inc. already had a debt on its balance sheet, which was also needed to be sold. Barclays made it more attractive by adding a 0.5% interest rate to it. Thus, the LBO was made quite intricate, and the deal was almost canceled. Nevertheless, on July 12, 2016, they went through with the deal and closed it.

Attractive aspects of LBO

An LBO generally represents a win-win situation for banks as well as financial sponsors. Thus they are quite attractive. In the case of a financial sponsor, he can employ the leverage and thus enhance his equity rate. The banks can also make it different from corporate lending and thus attain some significantly high margins by supporting the finances of LBOs. This is because the banks will be charging much higher interest. Moreover, the banks can obtain security or collateral too as proof or surety that they will get repaid.
In a leveraged buyout, the firm’s managers, employees, or other investors attempt to use borrowed funds to buy out the firm stockholders.
How much amount can the banks provide for an LBO
As mentioned, the LBO requires a lot of debt, and this depends on how much amount the banks are actually willing to provide for supporting an LBO. The amount varies and is dependent on several factors that are mentioned as follows:
• Overall economic environment
• The company’s quality is being acquired, i.e., whether the company’s operating cash flows are stable, its history, the prospects of growth, and the hard assets, etc.
• The experience and history of the financial sponsor.
The financial sponsor is offering • How much equity.
Characteristics of leveraged buyouts
The leveraged buyouts greatly differ in many aspects. However, some characteristics are there that hold in almost every LBO mentioned as follows:
• Strong management team – The chief executives will have worked with each other, and by rolling over their shares in the LBO deal, they might have some vested interests.
• Relatively lesser existing debt – The private equity firm will add up more debt in the company’s capital structure, which is to be repaid over time. Thus, this results in a lesser effective purchasing price. If the company already has acquired a huge debt balance, then the deal is very tough to be closed.
• Relatively lesser fixed costs – the fixed costs are to be repaid even if private equity firms’ revenues decline. Thus the fixed costs pose a risk for the private equity firms.
• Stability in cash flows – the acquired company in the LBO must have a stable operating cash flow.

Leveraged Buyout LBO Model in Simple Words
When consideration is given to the matter of the leveraged buyout model constructed by engaging in the usage of the Excel program, this refers to the conducting of an evaluation for a transaction classified as a leveraged buyout in shortened form is referred to as LBO. It is noted that such a transaction is regarded as acquiring a business that is financed via the application of a large amount of debt. It is further realized that the collateral used for the funding of a leveraged buyout is derived from the assets about the acquisition business and the assets of the business that is taking over the new business.

Leveraged buyout valuation model:

LBO model or Leveraged Buyout model is a representation system during the acquisition of a public or private company with a significant amount of borrowed funds, which needs to enable investors to properly assess the transaction and earn the highest possible risk-adjusted internal rate of return (IRR). LBO model consists of a process of determining a fair valuation for a company, determining the equity returns (through IRR calculations), determining the effect of recapitalizing the company, and determining the debt service limitations of a company from its cash flows.

See leveraged buyout model example video:

Usually, the process of this type of transaction involves the purchaser having a desire to make the lowest amount of investment possible in terms of pursuing and engaging in the usage of debt for the sake of being able to finance the rest of the price of the business. Or sometimes, other sources that are classified as being non-equitable may also be used for this purpose. The objective of the LBO model seeks to empower inventors to be able to assess transactions properly and to be able to achieve the most optimal level of internal rate of return that is noted as being risk-adjusted.

Within the context of the leveraged buyout, the reason for the business that is investing or the buyer to engage in the acquiring of the new business is for the sake of earning returns that are optimally high as possible in terms of their investment of equity by applying the usage of debt for the sake of augmenting the possible returns. The organization that does the acquiring sets forth determining whether the investment is worthy of pursuit via conducting calculations regarding the potential internal rate of return. Usually, the minimum in such cases is set forth as being thirty percent and higher. The internal rate of return sometimes can be even at a low rate of twenty percent for deals that are regarded as large or, in such cases, that the economy’s conditions are regarded as being unfavorable. Once the acquisition has been made, the ratio between the debt and equity is generally one to two times more because the debt makes up fifty to ninety percent of the purchasing price. The organization’s cash flow is then applied for the sake of paying for any outstanding debt.

Concerning the structure of a leveraged buyout model

Within the scenario of engaging in the transaction of a leveraged buyout, the investors, which are regarded as private equity or a firm that specializes in leveraged buyouts, may form a new organization used for the sake of being able to obtain the desired business. Following the completion of a leveraged buyout, the target business then is regarded as a subsidiary that pertains to the new organization, or the two businesses may undergo a merger for the sake of formulating one business enterprise.

Considering capital structure within the leveraged buyout model.

When the term capital structure is used regarding a leveraged buyout scenario, this correlates to the elements of funding that are applied during the process of buying a company for acquisitions. Though the reality is that there is different structuring applied in each case of leveraged buyouts, it is recognized that generally, there are many similarities about the capital structures of many businesses that are purchased new. In such cases, debt is the largest portion of the funding for leveraged buyouts. The usual capital structure seeks to supply funding that is the least costly and holds the least amount of risk. Then other additional sources of funding are applied.

It is noted that the capital structure of a leveraged buyout may contain debt that is obtained via a bank. Bank debt is also sometimes called senior debt. This is the cheapest funding that is available that is used for the sake of buying a company that is targeted during the process of a leveraged buyout. This would make up fifty to eighty percent of the capital structure for the leveraged buyout. This provides an interest rate that is lower in comparison to other forms of financing. This is why this type of funding is the highest preference among investors. On the other hand, debts with banks are associated with covenants and limitations that place restrictions on businesses regarding the payments of dividends for shareholders, increasing other debts with the bank, and purchasing other businesses when the debt is regarded as being yet active. The time for paying back debts with banks is set for five to ten years. If there is the business’s liquidation before the debt’s full payment, the debt with the bank must be paid immediately.

There can also be the application of high yield debt. This is regarded as being debt that is not secured. It generally carries an interest rate that is considered quite high to provide good compensation for the investors who have risked their finances. This type of debt possesses limitations that are less restrictive in comparison to bank debts. In such cases that a business decides to undergo liquidation, it is required to pay the high yield debt before any payment is provided for holders of equity. But this type of debt is still paid only after the bank’s debt has been paid first. This debt can be accessed via private institutional markets or public debt markets. The period for paying back this type of debt is set for eight to ten years. This type of debt sets forth options that offer bullet repayment details or early repayment details.

When we talk about capital markets, bonds, stocks, usually in reports, we can read about the LBO model. I hope that this article was simple enough to help you to understand this concept.

Filed Under: Forex terms, Stocks

Payoff Ratio

by Fxigor

In the financial industry, the payoff ratio is an important measure in portfolio management.

The payoff ratio or the profit/loss ratio is the portfolio average profit per trade divided by the average loss per trade. In simple words, the payoff ratio is the ratio between the size of the win and the loss’s size. If we have higher values – the portfolio performance is better.

The payoff ratio explanation video is below:

This is an important term when we talk about money management (visit our article about money management and expert advisors). The payoff ratio is not the same as the Sharpe ratio (Sharpe ratio is a measure of excess portfolio return over the risk-free rate relative to its standard deviation.)

How to calculate the payoff ratio?

Average win = Total Gain/number of winning trades

Average loss = Total Loss/number of losing trades

Pay off ratio = Average win / Average loss = (Total Gain / number of winning trades ) / (Total Loss / number of losing trades)

Example how we can calculate the payoff ratio for system or portfolio:

Our system or portfolio has :

300 winning trades
200 losing trades
The total gain is $9000
Total loss is $8000

than expected payoff forex ratio will be :

Average Win = Total Gain / number of winning trades = $9000 / 300 = 30
Average loss = Total Loss / number of losing trades = $8000 / 200 = 40
Pay off ratio = Average win / Average loss = 30/40 = 0,75

payoff ratio fomrula and calculation

What is a good payoff ratio? The payoff ratio above 0,8 is excellent.

About payoff ratio formula and other formulas
We use the Literature payoff ratio when we want to calculate the winning rate or win rate.

Win rate = Profit factor / (profit factor + payoff ratio)

A very similar term is Expected Payoff where

Expected Payoff = Total Net Profit / Total Number of Trades.

What payoff ratio can tell us about our portfolio?

It can tell us only about the risk-reward strategy, but it can not give us a nice explanation about our portfolio profitability.

We need to calculate average profitability per trade (APPT) or math language expectations except for this value.

Average profitability per trade = (Probability of Win * Average Win) – (Probability of Loss * Average Loss).

So let us calculate the Average profitability per trade for our case :

300 winning trades mean that from 500 trades, 300 are winning. Probability of Win = 300/500 = 60%
200 losing trades mean that from 500 trades, 200 are losing. Probability of loss = 200/500 = 40%
The total gain is $9000
Total loss is $8000
Average Win = Total Gain / number of winning trades = $9000 / 300 = 30
Average loss = Total Loss / number of losing trades = $8000 / 200 = 40

Average profitability per trade = (Probability of Win * Average Win) – (Probability of Loss * Average Loss) = 0.6*30 – 0.4*40 = $18 – $16 = $2

Payoff ratio vs. Profit factor

The profit factor is a better signal than the payoff ratio. The payoff ratio can be meager, and the system can be profitable. The payoff ratio without a win rate can not be used as a measure.

So if we know that :
The profit factor is the ratio when we divide profit from winning trades by the loss of losers.
Win rate is the percentage of winning trades based on the number of total trades.
The payoff ratio is the average winning trade divided by the average losing trade.

There is a rule about the Profit factor and payoff ratio :

The profit factor will stay constant if we lower the payoff ratio only if we develop a higher win rate strategy.

Payoff ratio calculator

 

How to count profit in forex?

In forex, the best way to calculate profit is to use percentages. In that way, you can measure daily, monthly, or yearly percentage gain. For example, the best trading performance is a 20% annual profit gain.

 

One important thing that we need to separate is one of the most common questions in finance.
Is the payout ratio the same as the payoff ratio? The payout ratio shows the proportion of earnings paid out as dividends to shareholders. The payoff ratio is the portfolio average profit per trade divided by the average loss per trade.

Filed Under: Forex Glossary

SOP – Standard Operating Procedures

by Fxigor

SOP meaning – What does SOP mean in business?

SOP or standard operating procedures are written, detailed easy-to-understand step-by-step instructions compiled by an organization to guide workers and team members to perform tasks (complex routine operations) in a consistent manner. SOP describes the activities necessary to complete tasks showing action points, written instructions, and process flowcharts.

Standard operating procedures example:

standard operating procedure example

A flowchart is created using https://www.lucidchart.com.

SOP acronym means standard operating procedure. As you probably know that SOPs are nothing but some documented processes that are primarily used to deliver consistent quality every time. If you are a product owner or process owner, then it’s important to use SOPs so that your products and services provide quality and consistent value to its customers. When a company is in a growing phase, then the company owner mostly takes all important decisions. But, when the company has already reached its capacity, the company owner can’t possibly take all the required decisions properly. That’s why the company should prepare documented SOPs to meticulously establish a proper succession plan and train its employee base accordingly.

Standard operating procedures are important to maintain the efficiency and safety of every department of a company/organization, such as strategic management, human resources and payroll management, production and operations, employee training, sales and customer service, legal, financial, and information technology, etc.

Additionally note, SOPs should never be documented poorly, and they should not be vaguely worded. Rather, the step-by-step instructions of SOPs need to be brief, crisp, clear, and easy to understand. Additionally, standard operating procedures should also be simple to follow, as well.

The SOP should be the key basis for every employee that’s working in an organization. Plus, standard operating procedures should also be used to training all new employees. On top of that, these instructions need to be updated frequently to align with the current needs.

Reveal three key aspects of SOP

Standard operating procedures can increase the value of any company (irrespective of its size and type).SOP follows a process-driven approach instead of a founder driven approach for its target customers.SOPs deliver consistent quality value to its customers.

What do you actually need SOPs or standard operating procedures?

i) SOPs save both money and time: If a company doesn’t follow a streamlined or standard operating procedure, it will be too difficult to accomplish a specific task. For example, if the same task is getting performed by an organization’s employees in many different ways, it will surely take more time to complete. Thus, it will certainly ensure a time-consuming process. That’s why it’s important to follow SOPs to accomplish their tasks in lesser time and money.


ii) SOPs improve communication and process flow:
It has been found in a recent survey that SOPs can excellently improve the communication and process flows of a company and its organizations. Consider a situation when an organization hires an employee. In that case, the employee must have the right idea about the processes and standards to be followed. That’s why the employees should follow SOPs as defined by the company for improved communications and expedited process flows.

iii) SOPs provide consistency: As already described before, the prime feature of SOPs is that they deliver consistent quality value to their target buyers or customers. When a standard operating procedure is already in place, the applicable business processes will automatically be followed correctly and accurately.


iv) SOPs ensure a safe and efficient work environment:
As you probably know that it’s important to maintain a safe and efficient work environment in every organization. Now, when it comes to maintaining a safe and efficient work environment, it’s of utmost importance to follow the SOPs precisely. Otherwise, if the company doesn’t follow a standardized process, then it will be too chaotic. The assigned job responsibilities of the organization will not be fulfilled correctly. As a result, it will impact the work environment. In turn, the company won’t deliver the right value to its customers in terms of its products and services, and this situation can significantly hamper the company’s reputation.

So, being a business owner or company owner, are you planning to create your own standard operating procedure? If yes, then please follow the below sections to learn more about it.

i) Create a detailed list of business processes: First of all, it’s needed to find out and create a detailed list of business processes. The managers can review this list; the managers can remove the redundancies and add any new points (if needed). Note, this list will act as the starting point when it comes to creating an SOP.

ii) Plan the right process: Once you have created the list, it’s time to plan for the right process. For example, whether the process will be written in the form of a workflow diagram or a step-by-step guide — this thing needs to be planned.


iii) Communicate with your employees:
In the above steps, you have learned to create a detailed list of business processes and plan the process. Now, it’s time to speak with your employees to understand and follow the process carefully.

iv) Write and review the process: Document the SOP instructions in a simple, clear, and detailed way so that it’s easy to follow by all. Also, you must review it at once.

v) Maintain the process: To make the SOP useful and relevant, it should be maintained properly. Additionally, you may need to update it on a time-to-time basis to meet the current company’s needs and expectations.

In our trading industry, many drop companies and trading corporate companies have SOP, and all those procedures help traders, analysts, and managers work better in the ordered systems.

Filed Under: Finance education, Forex Glossary

How to Calculate a Pip Value?

by Fxigor

Pip and pips are widespread terms in the trading industry. In this article, we will explain the basic concept.

What is a pip in forex trading?

PIP is the acronym for the phrase “percentage interest point.” It’s also known as a price interest point. A forex pip is the lowest price increase for a given pair. The pip value is a unit of measurement for currency movement in most currency pairs in the forex trade. The pip between two currencies varies. However, it is generally equal to the fourth decimal place in most currency pairs. For EURUSD or GBPUSD, for example, 0.0001 is one pip.

The pip value, as you know, is the standard by which a currency pair is compared. This also includes the exchanges of the currency pairs as well as the trade size. The significance of pip value is that through pip, you can show the amount of exposure and significantly influence your position. The pip value is defined by the pair of currency, trade value, and the currency pair’s exchange rate.

If you want to learn how to count pips in the MT4 platform for various symbols visit our article.

Currency must be exchanged to enable international transactions. There are a lot of bets and other transactions happening in the forex market. All these take place via speculators who are on the watch-out to earn money as the price of foreign currency moves.

How to calculate pip difference in forex?

To calculate pip difference in the forex pair, you need to count the decimal places where the last decimal place represents 1 pip difference. For example, EURUSD currency pair exchange rate 1.3012 has 4 decimal places, and each pip has the value of 0.0001. From 1.3012 till 1.3013 is 1 pip difference.  However, some currency pairs like USDJPY have 1 pip value of 0.01. For example, from 119.20 till 119.21 is one pip difference.

Now let us calculate the forex pip value:

How to calculate a pip value in forex?

To calculate the pip value, divide one pip (usually 0.0001 for major currencies) by the currency pair’s current value. In the next step, multiply that number by your lot size: the number of base units you are trading.

For example, if the exchange rate is 1.3, trading size 1 lot and currency pair EURUSD, then:

Pip Value = (Pip x Trade Size) / Exchange Rate= (0.0001 x 100,000)/1.3= $13.

The absolute value of the pip

To make it simple, each forex account will have a certain number of lots and pips. A lot is a collection or the lowest quantum of a currency that you’re going to trade. And the pip the lowest amount that currency can change.

The value of a foreign currency keeps on varying concerning other currencies. And, the absolute value varies with different currencies and with a particular currency. The pip shows to what extent a pair of currencies move up and goes down. The value of a pip is, therefore, varies across pairs of currencies. This article discusses pip value and the various aspects that go into calculating the pip value.

If the currency pair’s value increases up or goes down 0.0001, the currency pair’s price has gone 1 pip. Likewise, when the price increases or decreases 0.0005, it implies the price has moved 5 pips.

pip value in currency price

FX pips meaning examples

If the AUDUSD forex pair’s price varies from $1.0000 to $1.0009, it’s said the AUDUSD has risen by 9 pips ($0.0009).

If the price of EUR/USD rises from $1.3040 to $1.3045, the EUR/USD is said to have moved 5 pips.

What are 20 pips meaning in the forex market?  For example,  when EURUSD rises from 1.3000 to 1.3020, it is 20 pips.

What are 10 pips meaning in the forex market?  For example,  when EURUSD rises from 1.3000 to 1.3010, it is 10 pips.

What are 30 pips meaning in the forex market?  For example,  when EURUSD rises from 1.3000 to 1.3030, it is 30 pips.

What are 50 pips meaning in the forex market?  For example,  when EURUSD rises from 1.3000 to 1.3050, it is 20 pips.

Measuring PIP for the different currency

There are a few currency pairs that are expressed in terms of the second digit following the decimal. The pip value of yen-based currency included EUR/JPY, USD/JPY, AUD/JPY, GBP/JPY using two digits after the decimal.

Thus when the US/JPY goes from 112.00 to 112.90, the price is said to have increased by 90 pips (0.9).

Measuring pips for currency pairs

See more as in this Forex Pip Calculator:

Using this pip difference calculator (above), you can calculate the Eurgbp pip value, Eurusd pip value, Usdchf pip value, etc.

A different way of expressing pips in forex

So far, we have defined a pip in forex as the lowest incremental variation in the currency pair price. However, be aware that a pip’s monetary value is not the same across all pairs of currencies. For this reason, each trader must know the way the pip of the forex currency pair is determined. This helps the currency to gain currency and risk management.

Determining pip in USD trading account

The formula to calculate pip value in USD trading account (or non JPY account) is : (0.0001 / Current Exchange Rate)

The most traded currency in the international currency market is the US dollar. When the US dollar is listed second in a pair, the pip value is constant and does not have an account financed in USD.

On the other hand, if the USD is listed the other way, that it’s not the second, you need to dive the pip value by the USD/x***rate.

Determining pip from a non-USD trading account

The currency account is funded is listed second in a given pair of currencies.

The formula to calculate pip value in non USD account for cross currency pair is:


EURJPY Pip Value = [(0.01 / EURJPY Exchange Rate) x (EURUSD Exchange Rate)] x (Units Traded)

YYYJPY Pip Value = [(0.01 / YYYJPY Exchange Rate) x (YYYUSD Exchange Rate)] x (Units Traded)

Determining pip for pairs of other currencies

It is not that many currencies are being traded in your forex account. Of course, you can have a US account but wish to trade the EUR/GBP (Great Britain Pound).

We will explain how to determine the pip for pairs that are not included in your currency account.

As you know, the second currency is constant if you had an account in that currency. Thus, if you have a GBP count, the EUR/GBP pip is GBP10 for a standard lot.

Make sure to consider the current is proved the pip value: the second currency. Once you know the value, you can determine pip in the particular currency to your desired currency. You can do this by dividing it into the PPP/YYY, where PPP is your currency account.

Facts are:

The constant pip amounts are equivalent to $10 for a standard account.
The constant pip amounts are equivalent to $1 for a mini account.
The constant pip amounts are equivalent to $0.1 for a micro account.

These pip values are coterminous, where USD is listed second. For example, the euro/US dollar, British pound/US dollar, Australian dollar/USD. New Zealand dollar/USD.

Conclusion

If you have a clear understanding of PIP’s notion and how it works, it will help significant benefits; you will be able to judge the quality of the forex market in terms of profitability. Profitability, in turn, is determined by the quality of your judgment and foresight. For all this, you need to keep abreast of the market: the PIP value of the currency pair and the general market condition around. Thus, to realize the best result, calculating a pip value is important, and you need to leverage it.

In this article, you have a PIP calculator – so test it easily using different currency pairs.

Filed Under: Forex terms

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