Forex Pips in Profits and Losses
It is important for foreign exchange traders to understand what pips are. In the world of foreign exchange trading, a pip is simply short for percentage in point. There are traders who refer to pips as simply points. It is important that you understand the different concepts on forex pips if you want to maximize your earnings in foreign exchange trading. It is one of the most basic concepts that you should understand from the different foreign exchange lessons you might go through.
Forex pips are simply the smallest units of price for a specific type of currency. In currency pairs or in exchange rates, it is often indicated as the last decimal point. In most currencies, it is often 0.0001. For example, if you have bought USD/EUR at 0.6664 and sold it at 0.6676, then you have made 12 pips. If you have bought USD/EUR at 0.6664 and sold it at 0.6656, then you have lost 8 pips. A common exception is the USD/JPY currency pair because there are only two decimal places in this pair. Therefore, a pip in this pair is equivalent to 0.01. This simply means that if you have bought USD/JPY at 89.84 and sold it at 89.99, then you have earned 15 pips.
It is important for you to understand the concept of pips in forex trading because they are basis for calculating your profits or losses in foreign exchange trading. Making 12 or 15 pips can already mean a lot of money. Losing more than pips should already be a warning signal for you because you might be in for a large one-time loss.
But how exactly are forex pips used in trading? Currency prices fluctuate all the time, and this is why the value of a pip can change from time to time. What is important is that you know how much you have earned or lost in terms of pips so you will know how much value they have although prices might change every single hour.
For example, the exchange rate for USD/AUD (US dollar/Australian dollar) is 1.0762. The value of a single pip for a single dollar would be 0.0000929 and this is indeed a pretty tiny amount of money. A single pip for a thousand dollar investment would be .0929 or $0.09 per pip. But if your initial investment is $100,000, the pip value would change to $9.29. This simply means that if you have made 12 pips, you have actually earned $111.48. Therefore, forex pips become more significant with large sums of investment.
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