Fx trading
needs you to understand the term " pip " ,a pip denotes the smallest movement
in the price of a currency and it is this movement which determines your profit or loss when
closing your trading position.
For most,
but not all, currencies in fx trading a pip is 0.0001 or 0.01%. So, when a currency
moves from a price of 1.7800 to 1.7805 it is said to move 5 pips.
The easiest way
to understand how to calculate pip values in fx trading is to start by looking
at currency pairs involving the US Dollar. In any quote the US Dollar can be either the base
currency or the counter or quote currency and we'll start by considering the situation when
the US Dollar is the quote currency as in the case of EUR/USD, CAD/USD or GBP/USD.
Enter your e-mail address to receive a
report about latest news, our daily news letter our daily signals our teaching courses and additions.
In this case the situation is simple because a pip will always have a value of $10. So, in fx
trading if you are trading GBP/USD and the market moves in your favor by 5 pips you will
make a profit of $50. Let's see this in action.
Supposing
the rate for GBP/USD in fx trading is 1.9340. This means that 1 UK Pound is worth
1.9340 US Dollars. Bearing in mind that a standard interbank lot size is 100,000 this means
that 100,000 UK Pounds are worth 193,400 US Dollars. If the market now moves 1 pip so
that GBP/USD is 1.9341 then 100,000 UK Pounds will now be worth 193,410 US Dollars - a
rise of $10.
Now
let's look at the situation when the US Dollar is the base currency and consider a quote
of USD/GBP = 0.5170. Here 1 US Dollar is worth 0.5170 UK Pounds and 100,000 US Dollars
are worth 517,000 UK Pounds.
So,
in fx trading if the price moves up 1 pip then USD/GBP = 0.5171 and 1 US Dollar is worth
0.5171 UK Pounds and 100,000 US Dollars is worth 517,100 UK Pounds.
In this case
a movement of 1 pip in fx trading represents a value of 100 UK Pounds which,
translated into US Dollars gives a pip value of 193.39 US Dollars (100 ÷ 0.5171).
From this,
in fx trading we can see that with the US Dollar as the quote currency a pip will
have a value of $10 for a standard trading lot but that the pip value will vary with the market
price when the US Dollar is the base currency.
ForexOnlineTradingSystem.info is the ideal place tolearn Forex trading and provides information on a wide range of topics includingcurrency exchange rates and the benefits of testing the water through mini Forex trading.
