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As I mentioned in here, all trades are made in pips. So what are pips?
Pips are the standard forex unit that is used to calculate the profit or loss on open trades. It is the unit that expresses the change in value between two currencies. What a pip is equal to in real terms (i.e. dollars) depends on the currency pair. Usually one pip is equal to the last decimal place of a currency’s price. For example, I just opened my forex account and took a look at EUR/TRY, which has a buy price of 3.9741. One pip for this currency pair is therefore equal to .0001. Should the price change to 3.9742, then the position has increased by one pip.
Let’s go back to my summary from last week:
OANDA Corporation. (2017). OANDA fxTrade Forex Trading (Version 5.4.0) [Mobile Application Software]. Retrieved from https://www.oanda.com/mobile/
Looking at my GBP/CAD position, you can see that a pip is equal to .00001. My total loss is -107.1 pips. This loss is the difference between the current sell price (1.63584) and the price at which I sold the position (1.63513) times 10,000. Please note that because I am selling the position, I profit when the price goes down; if the price increases (as it did) I generate a loss.
Pips are usually converted to the first currency in a currency pair. A pip for a particular currency pair is equal to the value of one pip in the countercurrency (i.e. the second currency in the pair) x the exchange rate. For example, let’s say the exchange rate of GBP/CAD is 1.20 (one pound is equal to 1.20 canadian dollars). We already know that one pip is .00001 for this pair. In order to calculate how much a pip is equal to in GBP, I use the following formula:
In this case, a pip is equal to .000083 GBP. To convert this to dollars, I would then multiple .000083 GBP by the exchange rate between GBP and USD.
If you want to learn more about pips, Babypips has a much more in-depth discussion on Pips located here.