Pips in Forex: How to calculate and use in trading?

When it comes to online trading, it is important to learn how to calculate the capital you will need for your investment. This is necessary in order to calculate losses, profits and other fundamental points if you want to avoid losing a lot of money in your operations. For these and many other reasons, you should know what pips in trading are. In this article we will tell you not only about what pips are, but also about their purpose and how they are calculated, so that you can clear your doubts about it and apply the knowledge gained in your subsequent operations.

What is a pip and a lot?

A pip is a percentage or basis point, which comes from the English "Point in Percentage". It is an incremental price movement that has a certain value, depending on the asset and market you are interested in. Simply put, a pip is the smallest change in the value of an investment product, which is the unit of profit and loss calculation on your trading platform. You should also keep in mind a term that is closely related to pips: lots. A lot is the number of standard units of an asset with which a trader is going to initiate a transaction and is used to determine its size, which in turn facilitates the calculation of pips in your transaction.

Pips are often referred to as points or ticks. The term "pip" is commonly used in Forex, while the terms "pip" or "tick" are also used in commodities, stocks and so on. You can often find articles that mention pips as if it is something exclusive to Forex. However, it should be remembered that pips also apply to all other financial assets, and the difference is in the name.

As for lots, this is another trading concept that is often mentioned when talking about Forex, as it corresponds to the number of units of the base currency of a currency pair. While this concept is often mentioned in relation to the Forex market, it is appropriate to clarify that it applies to all other markets as well.

How much is a pip worth?

The value of a pip depends on the market in which an investor is interested, as it is used to measure how much the price of a particular asset has changed. It is important that you, as a trader, analyze the different assets that you are likely to start trading with because, as mentioned above, pips are useful not only for calculating the capital that you will need to invest, but also for knowing how much profit or loss you will make on each asset. This measure is useful to make it easier for traders to understand capital calculations, regardless of their broker.

In Forex, pips are calculated to the fourth decimal place in a given currency pair, except for pairs such as USD/JPY (US dollar and Japanese yen) where they are taken to the second decimal place. Even if your platform shows you 3 or 5 decimal places in the pair quote, pips are calculated at the fourth decimal place. The above refers to the fact that the pip value in the Forex market refers to the value of one pip for a standard lot. However, in other markets, the pip value depends on factors such as contract size and/or lot size.

How to calculate the value of a pip in Forex?

One of the most important things about pips is how to calculate them. To do this, we will go over some basics and give a simple example. The first thing to do is to calculate the difference between the start and close of the trade: if the EUR/USD buy price is 1.16650 and the position is closed at a sell price of 1.16640: 16650 - 1.16640 = 0.0001, hence the difference will be 1 pip.

Now, to determine the value of this pip, the calculation is done by multiplying the volume of the standard contract by the pip, which will be: 000 x 0.0001 = 10 USD in the quoted currency. This will represent the profit or loss for each point of difference between the opening and closing price. To calculate the value of a pip in the base currency, divide the pip by the value of the currency pair and divide by the volume: 0.0001 / 1.16650 x 100,000 = 6.00 USD, which will represent the value of each pip in the base currency.

Today, many brokers have a tool called a pip calculator, with which you can perform this calculation in a much simpler and more convenient way. To know how to calculate pips, ticks and other values in your transactions, it is important that you have a financial provider that can give you access to various analysis tools. With these tools, you will not only be able to know the value of a pip in Forex, but also its movement, the behavior of other assets and other aspects.

As far as risk is concerned, if you want to trade various assets using products such as CFDs or contracts for difference, you should make sure that the broker's website has quality educational content that resolves most doubts regarding online trading topics. The broker should be able to provide its clients with a user experience through which the investor can learn to recognize the different risks of leverage. One should also not forget about choosing an intermediary that is regulated and provides you with all the security you need, both for your invested capital and your trading information.

Conclusion

Pips play a key role in Forex trading as they allow traders to estimate the profit or loss of trades. Calculations related to pips may seem complicated, especially for beginners, but thanks to modern tools and calculators available from online brokers, the process becomes much easier. It is important to choose a reliable broker that provides the necessary analytical tools and educational resources so that traders can make informed and confident decisions.

FAQ

Q: How is the pip value calculated?
A: The pip value is calculated by multiplying the volume of a standard contract by the price change in pips.

Q: Does the pip value depend on the currency pair?
A: Yes, the pip value depends on the currency pair and may vary depending on the number of decimal places and transaction volume.

Q: How do I use a pip calculator?
A: Pips calculators offered by online brokers simplify the calculation of pip value by allowing traders to enter trade parameters and automatically receive results.

Q: How do pips affect the calculation of profit and loss?
A: Pips are used to measure the difference between the opening and closing price of a trade, allowing traders to accurately estimate profit or loss.

Q: What are CFDs and Contracts for Difference?
A: CFD (Contract for Difference) is a financial instrument that allows traders to speculate on the price movements of assets without owning them directly.