A general notion regarding forex trading is that it is just buying and selling of currencies against each other on the basis of differences in prices with relation to one another. This is actually true to some extent but there is more to the story as it seems, forex trading is not that simple. There are so many other aspects of forex trading when one dives in further such as the whole process of how forex trading works and what are the key elements of the forex market.
The unit of measurement to express the change in value between two currencies is called a pip, short for percentage in point or price, or interest point. If GBP/USD moves from 1.2050 to 1.2051, that 0.0001 USD rise in value is 1 pip. For most currency pairs, pip is the last decimal place of a price quote. However, there are some exceptions like Japanese yen pairs which go out to two decimal places like for a USD/JPY pair, it is 0.01. You can also check out the Forex Demo account details.
Furthermore, some forex brokers also offer to quote currency pairs beyond the standard “4 and 2” decimal places to “5 and 3” decimal places. This is called quoting fractional pips commonly referred to as points or pipettes. For instance, if GBP/USD rises from 1.4502 to 1.4503, that 0.00001 USD move higher is 1 pipette.
Pip movements affect the profits and loss of the traders that is why they are so important to learn about. For example, if you are going for a trade with a USD/EUR pair the effect of 5 pips change on the dollar amount depends on the number of euros purchased. If an investor buys 10,000 euros with U.S. dollars, the price paid will be US$10,700.90 ([1/0.9345] x 10,000). If the exchange rate for this pair increases 5 pips, the price paid would be $10,695.18 ([1/0.9350] x 10,000).
Before going for actual forex trading a forex trader must know what pips are in order to calculate their profits or loss. The understanding of these basic forex concepts will help the traders in the long run to trade better and manage their capital more effectively. But your forex broker’s platform will also do these calculations automatically so you get assistance.