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What are ‘pips’ in forex trading?
In forex trading, the smallest price change is the last decimal point. Given that most major currency pairs, such as those involving USD, EUR and GBP, are priced to four decimal places, a pip in this scenario is a price movement of 0.0001. For example, if GBP/USD moved from 1.4000 to 1.4001, it has moved by one pip. Comparatively, currency pairs using the Japanese yen (JPY) are only quoted to two decimal places. In this case, a pip is a price movement of 0.01. For instance, if GBP/JPY moved from 150.00 to 150.05, it has moved by five pips.To get more news about pips in forex trading, you can visit wikifx.com official website.
You can trade on the forex market through financial instruments such as spread betting and trading CFDs (contracts for difference). This involves opening positions based on the prediction that one currency will strengthen against another. For example, for every pip or point that a currency’s value varies, this will result in profits or losses for the trader, depending on the direction that the market heads.
How to use pips in forex trading
If a trader enters a long position on GBP/USD at 1.5000 and it moves to 1.5040, the price has moved 40 pips in the trader’s favour, potentially leading to a profit if the trade is closed. On the other hand, if the trader goes long on GBP/USD at 1.5000 and the exchange rate falls to 1.4960, the price has moved 40 pips against the trader, potentially leading to a loss on the trade if it is closed.
Similarly, if a trader goes long on GBP/JPY at 145.00 and it moves to 145.75, the price has moved 75 pips in the trader’s favour. If the exchange rate goes against the trader, and GBP/JPY falls to 144.25, the price would have moved 75 pips against the trader.
As well as measuring price movements and profits and losses, pips are also useful for managing risk in forex trading and for calculating the appropriate amount of leverage to use. For example, a trader can use a stop-loss order to set the maximum amount he is willing to lose in terms of pips on a trade. Having a stop-loss in place will help to limit losses if the currency pair were to move in the wrong direction.
Forex position size calculator
Pips can be used for the calculation of position size. If a trader’s combined position sizes are too large and they experience a number of losses, their capital could be wiped out. Therefore, trading with an appropriate position size is essential.
There are several steps involved in calculating position size:
A trader must determine the amount of capital they are willing to risk per trade. If this is 1% per trade, they could make a minimum of 100 trades before their capital is wiped out. If the trader’s account has a balance of $5,000 and they are willing to risk 1% per trade, this equates to $50 per trade.
Traders can determine a stop-loss in pips. For example, if a trader goes long on EUR/USD at 1.3600, they could place a stop-loss at 1.3550. This stop-loss equates to 50 pips.
The last step depends on what lot size is being traded. A standard lot refers to 100,000 units of base currency and equates to $10 per pip movement. A mini lot is 10,000 units of base currency and equates to $1 per pip movement. A micro lot is 1,000 units of base currency and equates to $0.10 per pip movement.
If the trader risks 1% of his $5,000 balance per trade for a micro lot ($0.10 per pip movement), the position size would be $50 / (50 pips x $0.10) = 10. Therefore, the trader’s position size would be 10 micro lots.