What are PIPs in Forex Trading?

PIP stands for Percentage In Point and is a valuable tool in Forex trading. PIPs make the foreign exchange market tick, as they form part of an active currency pair that can be very profitable to those who know how to use them.

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When trading on Forex prices fluctuate rapidly depending on market sentiment and news events driving them up or down; hence it’s not unusual for pips to reach three digits even during very active trading sessions. If you’re new to Forex trading, you must familiarise yourself with some key terms, including pip values, so that you can get an idea of just how much money is involved when you’re trading.

PIPs play a vital role in many other financial instruments such as stock index futures and commodity futures. However, this article will only focus on PIPs in the foreign exchange market.

How do PIPs work?

PIPs are quoted to four decimal points, although they can be calculated as eight decimal points. When a currency is bought or sold, the PIP quote will move in line with any changes in the bid/ask spread.

If a trader buys a currency at 1.3520 and sells it again at 1.3526, he has made a profit of 6 PIPs on his trade. This doesn’t seem like much, but if this were done three times per day, every day for 30 days, it would equal an extra 180 PIPs or 8400 pips per month! That’s about 20 % extra on your monthly return.

How close you are to the market when trading PIPs is vital, as it can determine whether your trade makes money or not. The closer you are to the market, the better chance of capturing large profits within a short amount of time. This can be done by using limit orders at key areas or by entering markets on high volatility days where lots of traders are active, and prices move quickly.

For example, if one wanted to capture small pips gains every day, they could open themselves up for risk by buying an investment that’s low in value (like GBP/USD) then selling it again at a higher price (like USD/USD JPY). If it costs $100 to buy £100 worth of GBP, then £100 or $200 to buy £200 worth of GBP. Then sell the newly purchased £300/$400 back into US dollars; you would have made three pips on your first trade and 6 PIPs on your second. This would give you a total of 9 PIPs.

Risks associated with using PIPs

The max loss on a trade is 100 PIPs or 1 Lot. If your Stop Loss is 40-50 pips away from the entry-level and the price moves against you by 50 pips (or higher), all your 100 PIPs will be lost. A high number of trades means that you need to spend more time watching over them and analysing how each one performed so you know which ones had a good gain/loss ratio and deserve being closed out with a profit/loss calculation.

You have to pay for every one of those trades; hence if you place ten lots at a low lot value rate, it may soon add up to a considerable amount of money, especially since most brokers levy an additional hidden commission fee on top of the spread for every PIP movement.

Final Word

Beginning Forex traders are often surprised at how much money is involved when trading currencies, especially since you can buy or sell almost anything from stocks, indices, oil and gold and foreign currencies. All it takes is time to learn the ropes and make informed decisions that will raise your profits while keeping your risks low. New investors are advised to use reputable online brokers Saxo Bank; visit the site here for more information.