Pips in forex
The concept of Pips in forex is very important to understand Forex. Pip tells us the exchange value of two currencies. It is the unit which measures what is the exchange value of the currencies you are trading.
For example, you are trading with GBP/USD and the movement goes from 1.5201 to 1.5202, then the .0001 USD rise is the 1 pip. Most pips are 4 decimal places and they are the last place of the decimal quotation. Except for Japanese Yen pair, they have 2 decimal place.
There is also a fractional pip, it is also known as a pipette. It is pip when the last of the decimal are placed in 3 or 5 decimal places. Like 1.51002 to 1.51003, the last decimal is put on the 5 place, it is one pipette.
How to find out a Pip value
For example, imagine that you are trading on forex market with you 300,000 dollars. The trade is USD/CAD which closes by gaining 20 pips when it reaches 1.0568. To calculate whether you have made profit or loss, we have to follow these steps.
First, we have to multiply the amount of trade by 1 pip to find the number of CAD for each pip. Here, the amount is 300,00 USD and the 1 pip is .0001
So, the multiplication is
300,000*.001=30 CAD per Pip
Second, use the closing rate, here it is 1.0568, to divide the answer to find the USD per Pip.
So, the calculation 30/1.0568=28.39 USD per Pip
Lastly, just multiply the amount of the pips you have gained from the trade, your pips is 20 at this trade of 300,00 dollars, and multiply it with the amount USD per Pip.
The answer to your loss or profit is 20*28.39= 567.80 USD profit.
The answer is in us dollar because you are buying the dollar and selling Pound, that is the answer. Your profit in the dollar when you sell the pound.
Remember, the amount of pips, that your trade has gained will be used in the last step to find out your loss or profit. That is why, if your pip movement is negative, no matter how much the amount it is, it will be a negative result in the profit calculation and you will lose money. So, the most important part of your forex trading is your Pip movement or Pip changing. If pip changes to smaller digit when it was closed then opened, for example, 1.5217 to 1.5211, your pip change is negative, and you will lose money.