In trading, a “point” is a very small price movement. This term is abbreviated to “percentage point”. In fact, a point is the smallest movement that a currency can make in the Forex market, and it is an important unit of measurement in currency trading.
Traders use pips to measure the movement of currency prices. Determining the number of points in a certain price movement is a simple process, although it depends on the currency pair being traded.
What Is a Pip?
Pip” is an abbreviation meaning “percentage in point” or “price percentage”. A point is the smallest price movement per whole unit that the exchange rate can make in accordance with the rules of the Forex market.
Most currency pairs have a price with an accuracy of four decimal places, and one point is the fourth decimal place (i.e. 1/10 000 th). For example, the smallest movement of the USD/CAD currency pair by an entire unit is $0.0001, or one point.
Piers used in Forex trading should not be confused with basis points (bps), which are used in interest rate markets and represent 1/100 of 1% (i.e. 0.01%).
How to use pips in forex trading?
If a trader enters a long position on GBP/USD at 1.5000 and the rate drops to 1.5040, then the price has changed by 40 points in favor of the trader, which can potentially lead to profit in case of closing the transaction. On the other hand, if a trader opens a long position on GBP/USD at 1.5000 and the rate drops to 1.4960, the price will shift by 40 points against the trader, which will potentially lead to a loss if the transaction is closed.
Similarly, if a trader opens a long position on GBP/JPY at the price of 145.00 and the rate reaches 145.75, it means that the price has changed by 75 points in favor of the trader. If the rate goes against the trader, and GBP/JPY falls to 144.25, then the price moves 75 points against the trader.
In addition to measuring price movements, profits and losses, pips are also useful for managing risks in Forex trading and calculating the required amount of leverage. For example, a trader can use a stop loss order to set the maximum amount he is willing to lose in points on a trade. The presence of a stop loss will help limit losses if the currency pair moves in the wrong direction.
Forex position size calculator
Pips can be used to calculate the position size. If the total size of a trader’s position is too large and he suffers a number of losses, then his capital may be reduced to nothing. Therefore, it is very important to trade with the appropriate position size.
The calculation of the position size includes several stages:
- The trader must determine the amount of capital that he is willing to risk in each transaction. If it is 1% per trade, then a trader can make at least 100 trades before his capital is reduced to zero. If a trader has $5,000 in his account and is willing to risk 1% on a trade, this means $50. on a deal.
- The trader can determine the stop loss in points. For example, if a trader opens a long position on EUR/USD at 1.3600, he can set a stop loss at 1.3550. This stop loss is equal to 50 points.
- The last step depends on which lot is being traded. The standard lot is 100,000 units of the base currency and is equal to $ 10 for one point of movement. The mini-lot is 10,000 units of the base currency and is equal to 1 dollar for one point of movement. The micro lot is 1,000 units of the base currency and is equal to $0.10 per item.
If a trader risks 1% of his balance of $5,000 per micro lot transaction ($0.10 per movement point), then the position size will be $ 50 / (50 points x $ 0.10) = 10. Thus, the size of the trader’s position will be 10 micro lots.
Pip value calculator
How much profit or loss one point of movement brings depends on the value of each point. In order to learn how to determine the value of a point, we need to know the following three things: the traded currency pair, the transaction amount and the spot price.
Pip value indicator on MT4
Calculating point values can be difficult and time consuming, and some traders prefer to focus on improving their Forex trading strategy. That is why the pip indicator was developed for MetaTrader 4, an internationally recognized trading platform that we host. A wide range of indicators for MT4 is available for download separately to your account.
The value of a point on the Forex market can be calculated using the above formula and displayed on our own trading platform Next Generation in the form of charts and price charts on the Forex market. They can be customized using our drawing tools. We have a wide range of technical indicators that will help you in choosing a trading strategy in the Forex market.
What causes pip values to change?
The basic value of a trader’s account will determine the value of a point for many different currency pairs. For an account denominated in US dollars, which is typical for the most traded currency pairs, if a currency pair has the US dollar as the second (quoted) currency, then the value of the item will always be $10 for a standard lot, $1 for a mini lot and $0.10 for a micro lot.
The value of the point will change only if USD is either the first (base) currency in the currency pair, or will not participate in the pair, and also if the value of USD changes significantly by more than 10% in any direction.
Summary: pips in trading
In the Forex market, traders use pips to measure price movement, profit and loss. Pips also play an important role in risk management. For example, a trader can determine the stop loss on a trade in points, which allows you to limit potential losses on a losing trade. Pips can help traders calculate the most appropriate position size to avoid excessive risk when opening too large positions, fraught with large losses. Learn more about developing your own Forex trading strategy, such as swing trading, day trading and Forex scalping.