Understanding Pips and Points in Forex Trading
In the forex market, prices are quoted in pips. A pip stands for "percentage in point" and is the smallest price increment in currency trading.
For most currency pairs, a pip is equal to 0.0001 or 1/100th of a cent. However, for currency pairs that involve the Japanese yen, a pip is equal to 0.01 or 1/100th of a yen.
For example, if the EUR/USD currency pair moves from 1.2000 to 1.2005, that's a movement of 5 pips. If the USD/JPY currency pair moves from 109.50 to 109.60, that's a movement of 10 pips.
Pips vs Points
While pips are the most common way to measure price movements in forex trading, some brokers may also use points instead.
A point is a different way of measuring price movements and is based on the actual price of the currency pair. For example, if the EUR/USD currency pair moves from 1.2000 to 1.2010, that's a movement of 10 points. The value of a point is determined by the broker and can vary depending on the currency pair and the trading platform.
Calculating Profit and Loss in Pips
Since pips are used to measure price movements, they are also used to calculate profits and losses in forex trading.
For example, if you buy the EUR/USD currency pair at 1.2000 and sell it at 1.2010, you have made a profit of 10 pips. If you bought 1 standard lot (which is 100,000 units of the base currency), your profit would be $100 (10 pips x $10 per pip). If you bought 1 mini lot (which is 10,000 units of the base currency), your profit would be $10.
Similarly, if you buy the USD/JPY currency pair at 109.50 and sell it at 109.40, you have made a loss of 10 pips. If you bought 1 standard lot, your loss would be $100. If you bought 1 mini lot, your loss would be $10.
