Legal Law

Forex Trading – What is a Pip?

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Currency pairs move in pip increments: for every pip the pair moves in your favor, you make money, for every pip the pair moves against you, you lose money.

Generally, the pip is the fourth decimal place in the quoted exchange rate, although if the pair is quoted in Japanese yen, then a pip is the second decimal place.

For most major currency pairs quoted in US dollars, the value of a pip is USD10 and a contract is defined as 100,000 of the first named currency. If the AUD / USD exchange rate is 1.0664 US dollars per 1 Australian dollar, this means that AUD100,000 can buy USD106,640, so we could represent the AUD / USD pair as AUD100,000 / USD106,640. For every pip the Australian dollar goes up, you earn USD10, so a one pip increase would look like AUD100,000 / USD106,650.

If a different currency pair were quoted, the value of a pip would also be different, so for the EUR / GBP pair, a pip would be 10 pounds, instead of 10 dollars.

Let’s use a forex CFD as an example: when you trade a forex CFD, you are trading on margin, which means you only need to shell out a fraction of the total value of your position, so it is a more realistic starting point for newcomers. traders who cannot have the capital to buy real currency.

If the AUD / USD bid / offer spread is trading at 1.0664 / 1.0665 *, you can choose to sell a series of contracts at 1.0664 in the hope that the currency will fall, in which case you will be able to make money on the difference. in price when you buy back the currency at a later date, that is: going short. Or, you can choose to buy multiple contracts at 1.0665, in the hope that the value of the Australian dollar will go up, and then you could make a profit by selling your contracts at a higher price once the value has risen, i.e .: goes long.

He thinks the Australian economy is looking good, so he decides to go long, buying five contracts at 1.0665. This makes your position value $ 533,250 (5 contracts x AUD 100,000 x $ 1.0665 = $ 533,250). To open the CFD position, you only need to provide a deposit of 0.5%, or USD2,666.25.

A few days later, the AUD / USD has risen to 1.0701 / 1.0702 and you make your profit by selling your five contracts at 1.0701. Your profit is calculated by subtracting the value of your opening transaction from the value of your closing transaction.

Closing of the transaction 5 contracts x AUD100,000 x USD1.0701 = USD535,050
Opening trade 5 contracts x AUD100,000 x USD1.0665 = USD533,250

Gross profit = USD1,800

However, if you prefer to calculate your gross profit in pips, the difference between your closing and opening position is 36 pips (1.0701 – 1.0665 = .0036). One pip is worth $ 10, so 36pips x $ 10 = $ 360. Since you had five contracts, USD360 x 5 = USD1,800.

* This is a 1 pip bid / offer spread, or 0001. With a 1 pip spread, the value of the first currency only needs to change 2 pips for you to profit. CFD and forex providers may have different bid / offer spreads, and you will need more significant currency swings to profit the wider they are. It is always a good idea to choose a forex and CFD provider that transfers tight spreads to their clients when spreads in the underlying currency market are tight.

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