If you’re a foreign exchange (also known as forex) trader, you should know the term “pip.” A pip is the smallest decimal place measured in forex trading, which may change from currency to currency. If that’s confusing to you, don’t worry. Follow along with this pip forex guide to learn everything you need to know for your forex account.
In this Guide:
What Are Pips in Forex Trading?
Just as you may use the term “basis points” or “bps” when talking about interest rates, you will come across the term pips in the forex markets. For many currencies, one pip is equal to 1/100th of 1%, or .0001.
The screenshot above shows that the EUR/USD currency pair is tracked out to five decimal places. But with the USD/JPY currency pair, only three decimal places are relevant. The difference is due to the value of the currencies.
While .001 yen may be relevant when compared to the US dollar, .00001 yen has so little value it isn’t used. However, when trading more valuable dollars and euros, the fifth decimal place can add up to a big difference.
How to Calculate Pips in Forex
In your forex account, you shouldn’t have to do much calculating. If you’re using a quality forex brokerage account and trading app, the big calculations are done for you.
Here’s an example if you want to understand how pips work with a real currency. Let’s say you are looking at the GBP/USD pair. If you are trading a standard lot, or $100,000, one pip equals .0001 x the exchange rate x 100,000.
= 0.0001 x 1.4108 x 100,000
Forex Pip Value Table
Pip values constantly change as exchange rates fluctuate. Here’s a look at a recent pip value table based on a standard lot of $100,000:
How to Get More Pips in Forex Trading
If you want to earn more profit in your forex account, you may be looking to get more pips. In this case, we’re using pips as a term for earning profits.
Most forex traders follow an active trading strategy based on technical analysis. Technical analysis is a strategy of using recent market price changes to predict future prices. If you’re successful, you can use charts to figure out where a currency will go and earn a profit from your trading strategy.
You can also use advanced trading strategies to capture profits and minimize losses. Consider using a personal profit-taking system, so you don’t squander a good thing and using stop-loss orders to keep a bad trade from going out of control.
|Lot Size Name||Number of Currency Units|
50 Pips a Day Forex Strategy
Some people may want to follow a strategy where they “earn” 50 pips per day. Depending on the size of your portfolio and investments, that could mean making $5 or making $5 million. How much you make (or lose) scales with the size of your portfolio.
The 50 pips a day forex strategy can be used with any currency pair and works well for beginners as it can help you limit risk. With this strategy, you stick with simple buy and sell orders with stop losses and automatic sell orders in place. If your trade reaches a point where you’ve earned 50 pips, it will automatically close and capture your profit.
Pip Forex Example
Here’s another example of how forex pips work:
Let’s say you are looking at the USD/ILS (New Israel Shekel) pair. As of this moment, the USD/ILS exchange rate is $1 per ₪3.24664.
As with the example above, if you are trading a standard lot, or 100,000 shekels, one pip is equal to .00001 x the exchange rate x 100,000. The math leads us to this valuation for one pip:
= 0.00001 x 3.24664 x 100,000
What Are the Risks?
When trading forex, you are treading in risky waters. Forex markets can be highly volatile and unpredictable, despite your best efforts to predict the future. Like other forms of short-term trading, active forex trading is inherently risky and not right for most investors.
If you’re only buying simpler long positions, you likely won’t lose your entire investment as most currencies are always worth something. However, with riskier options contracts, leverage, margin, and more complex trading strategies, it’s easy to get caught up in the action and lose a small fortune in the blink of an eye.
If you’re trading forex, be sure you understand the risks and don’t risk more than you’re willing to lose.
What Are the Potential Gains?
If you fine-tune a profitable forex strategy, the sky’s the limit — or the moon if you’re into trading cryptocurrency like dogecoin. As with any active trading or investment strategy, there’s no limit to what you can earn.
As risk increases, so does the chance to profit. With leveraged forex products that give you multiple times the market exposure with a smaller investment, you are in a position to rapidly grow your starting investment.
Sounds kind of like a Las Vegas casino, doesn’t it? Be very careful that your trading strategy doesn’t turn into gambling.
Further Reading: How to Invest in Cryptocurrency
Is Forex for You?
Forex is a risky and exciting marketplace. If you understand the complexities and mechanics that drive prices, you could be in a position to walk away with a profit. However, it’s best to start slowly and avoid risking more than you can afford to lose. Unlike a boring old index fund, there’s a lot of volatility in forex.