Whenever talking about forex you will hear a lot of people that are talking about pips. They will say that they made a profit of X pips while others might say that they lost Y pips. People that are not a part of the forex market will not know what a pip is. If this is a market that you want to be a part of, you really need to understand the basic concept of pip.
Forex Pips – Definition
Pip basically means Percentage in Point. The value is used to represent the currency’s smallest measurement value that is traded through forex. Most major currencies will be measured till 2 decimals around the world. When dealing with the forex market, all calculations will be done till the 4th decimal. We have one exception in the Japanese Yen because it will only be calculated to 2 decimals. This basically means that the smallest possible move that happens has a pip of .0001, commonly referred to as one basis point.
Pip Value Calculations
Forex pips value will change based on market fluctuations. Even so, it is not at all hard to calculate them. As an example, let us think about pip calculations for USD as a quote and base currency. The USD at Base currency will show a pip of 0.0001 per exchange rate. This basically means that if we were to buy one lot of 100 thousand pairs for USD/CHF with an exchange rate of 1.2490 a pip is going to be valued at 0.000800640. The forex pip value is going to be set at 8.0064. The USD at a Quote Price will always have a pip value of one.
Trading with the Use of Forex Leverages and Pips
The forex market fluctuations will bring in changes in the value of the currencies every minute. Just like in the above mentioned example, a 1 pip value is actually very small. You might wonder how a big trader can make millions of dollars with such small pips? Leverages is the answer. Most forex brokers will allow a trader to use a leverage of 100 to 1 and there are some that even allow 500 to 1. In order to purchase a basic lot of 100 thousand dollars you just need to deposit 500 dollars if the leverage offered by the broker is 200 to 1. Let us take a look at differences that leverage can offer.
In the event that USD/CHF is present at a value of 1.1535 then when you invest 1000 dollars without using leverage you would gain a profit of 0.0867. When you use a 100 to 1 leverage you will gain a profit of 8.6692. The problem is that the use of leverage is quite risky because you can make more money but you can also lose more money.