Forex Pips

Understanding Forex Pips

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Understanding forex pips
What are forex pips?
It is extremely important to understand what forex pips mean as it plays a vital role in foreign currency exchange. Forex pips can make a vast difference in your profit or loss as forex pips determine how your profit increases or decreases. Let’s first see what forex pips mean. Pip is the short name for ‘Percentage In Point’. Pip is the smallest price increment in foreign currency trading. In simple words, pip is the smallest movement of the currency.
Let’s look at this example: Consider the currency pair; GBP/USD.
•    Let’s assume the forex rate between the pair at this moment as GBP/USD = 2.0023.
•    In a few minutes time, the forex rate for this currency pair can be changed to GBP/USD = 2.0024. Note that the currency rate has increased by 0.0001.
•    This increment is called a ‘pip’.
•    Imagine the rates further go high during the next couple of hours and finally reaches GBP/USD = 2.0098.
•    Now, we say that it has gone up by 75 pips (2.0098 – 2.0023 = 0.0075 = 75 pips).
•    In simple words, change of one thousandth of the forex rate is called a pip.

To understand the forex pips easily, you can use an international currency as the base. This becomes quite efficient, as most of the international currencies are quite stable compared to local currencies. Therefore, many people and institutions compare other currencies against the international currencies such as the US Dollar, Sterling Pounds, and the Euro. This way, it is quite easily to measure and understand the fluctuations of other currencies when it comes to forex pips.
An example for forex pips
•    Now let’s take another example for understanding how forex pips work. Let’s consider the same currency pair we considered in the first example:
•    GBP/USD = 2.0023. This simply means one GBP (Sterling Pound) worth USD 2.0023.
•    It also means, 100,000 GBP worth USD 200,230.
•    Now imagine after a few minutes, the exchange rate went up by one pip (0.0001).
•    Now if you calculate the value of GBP 100,000, you get USD 200,240 (GBP 100,000 x 2.0024).
•    The total increment of the money for the period comes as USD 10 (USD 200,240 – USD 200,230).
Usually forex is traded in currency lots; in other words, as a block of hundred thousand. One lot of GBP means GBP 100,000. Therefore, in the above example, we got $10 profit for 1 lot.
Whenever the exchange rate between two currencies goes high, the rate is said to rise by more forex pips. More pips simply means more profit. The conclusion is that, you need to invest your money for exchanges where you get the highest forex pip and more forex pips per move.
The above conclusion is the base of foreign exchange trading. It is all based on the forex pip value and the number of forex pips of the currency move. Now you know what to look for when you do forex trading right?
Look for the best currency pairs that give you the biggest rise in forex pips. But there is a catch in forex pips. The two parameters we discussed; the pip value and the number of forex pips do not really go together. When it comes to most currencies, if the forex pip value is higher, then these currencies do not move more than a couple of forex pips at a time. If the number of forex pips in the currency rate change is higher, then usually the value of one pip is relatively low. So, when you engage in forex trading, you may want to trade off between the two and go for the best deal.
Usually the forex pips do belong to two categories; fixed and variable. Depending on the currency pair under consideration, forex pips value can be either fixed or variable (floating). Usually the forex pips value is calculated for standard lots.
In the above example, we considered GBP 100,000. That’s because the standard lot value is 100,000 units. This is the standard unit size for a transaction. When we talk about foreign currency trading, we talk about 3.5 lots and not GBP 350,000. There are many online forex pips calculators available for calculating the profit that can be earned from forex rate change. Simply by using one of the pips calculators, you can save your time and effort for calculating the same manually.

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