A pip, that’s a term you need to understand well if you are thinking of going into forex trading. It is a term used by traders to measure how much they have earned or lost in their trades. Seems not to be very important compared to other forex terms such forex indicators or leverage, but not knowing what pips mean to a trade can be costly.

Forex trading is normally done in pairs. The second of the currency pairs being traded is the quote price. This means that in the currency pairs EUR/USD, the US dollar will be the quote price. The price of this currency pair will be what the present value of the US Dollar is against 1 Euro, for example $ 1.70 or 17000.

You will notice that the quote price has to zeros added. The two zeros stands for the quantity of the currency pair to be traded. And the forex pip will be the measure, the smallest measure, of change or movement in the price to the quote.  One pip will be equivalent to 0001.  In the example given, if the 17000 price changes to 1070 you would have gained 10 pips. How do you calculate earnings using the pips? There is what traders call as $ 100,000 standard lots, so if you gained 100 pips trading this lot your earnings will be $ 1,000.

The currency quote will vary, of course. Sometimes it will be USD/Euro. The same process of calculating movements and earning will be the same. But this time it’s the price of the Euro will be used.  The formulas may appear perplexing at first. However, you have enough time to get familiar with them once you start you demo trades.  Pips become easier to understand when you get more time to engage in “actual trading”.





KC Yap is an author who likes to write about all interesting events in the world

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