Pip In Forex trading is used for currency trading that is often done between the euro, the Japanese yen, the US dollar, the Canadian dollar, and the British pound. It is one of the useful tools used for this trading.

Pip or price interest point or percentage in point is a measurement tool associated with the smallest price movement any exchange rate makes. Usually, there is four decimal places used to quote currencies.

The last digit would be the smallest change of a pair. This would make 1/100th of a percent equal to one basis point or one pip. For instance, if there is a change of a currency price from 1.1200 to 1.1205 this means that there is a change of five pips.

Understanding the Pip in Forex Trading

Every pair expresses the relation between the two currencies. For example, EUR/USD represents the relationship between the US dollar and euro. The base currency is the first currency and the quote currency is the second currency. 

If you want to buy EUR/USD for 100,000 currency units while the price is 1.1200, the US dollar needed is $112,000 for 100,000 euros (100,000 * 1.12). 

In a currency pair, the value of one pip in Forex Trading can result from the division of one pip in decimal (that is 0.0001) and the current exchange rate. The result then is multiplied by the notional amount.

Currencies that are among the highest volume and most traded are the major pairs. They are USD/JPY, EUR/USD, USD/CHF, and GBP/USD.

All of these pairs contain the US dollar. In currency pairs that are denominated by yen, there are only two decimal places for a pip, or 0.01. 

To get a clear understanding of how pip in Forex Trading works, we will go back to the example aforementioned. Assume that the 8.93 euros is the value of one pip ((0.0001/1.120) * 100,000).

The value resulting from the conversion of the pip to the US dollar is by multiplying the exchange rate by the pip value. So, the result is (8.93 * 1.12) $10. 

Every currency has different exchange rates. This causes variation in the pip value. When the quoted currency is the US dollar, US$10 will always be the pip value for 100,000 currency units of the notional amount.

Pips and Profitability, the Relationship

A trader can make a loss or profit with a reliable broker like Salmamarket forex broker depending on the currency pair movements. If a trader buys EUR/USD, he/she can generate profits if there is an increase in the EUR value relative to the USD.

If the euro is bought by a trader at 1.1835 and he/she exited the trade at 1.1901 then the profit resulted will be 66 pips (1.1901 – 1.1835). Now let us look at another example which is USD/JPY.

If there is a trader who purchases this pair at 112.06 and the trade is closed at 112.09 then the trader will lose 3 pips. But there will be 5 pips if he/she closes the position at 112.01.

Although the difference is small when trading with the best forex broker, losses and gains can quickly add up. For example, if in this set-up there is a $10 million position and then closes at 112.01.

There will be ¥500,000 profit booked by a trader as a result of $10 million x (112.06 – 112.01). The profit calculated in the US dollar is $4,463.89 as a result of ¥500,000/112.01.

Traders should be aware of and prepare the best strategies to deal with every condition in the forex market whether it is winning or losing. 

Choosing a licensed broker like salmamarket is important for your trading journey. We are an experienced broker that provides many advantages like pip in Forex Trading.