If you have a keen interest in various global currencies, consider trading Forex. Placing a trade in the foreign exchange market is simple, really. Set your eyes on a currency pair, decide if you wish to buy or sell, and place the order. That is it.
Once you get a good understanding of Forex trading and start reading technical analysis articles, at one point or another, you will come across the term “pip”. What is a pip? Why does it matter in Forex trading? Let us try to answer these questions and offer some insight.
Pip, defined
It is necessary to exchange currencies to simplify international trade and business. The place where all important transactions occur is, of course, the foreign exchange market. Pips are useful because they help calculate the rates that market participants pay when realizing transactions. Pip represents the percentage in point or price interest point.
It is a metric deployed for measuring the difference between the opening price and the closing price in the foreign exchange market, which can be realized in terms of quote or underlying asset.
The value of the pip depends on the market under consideration. The GBP/USD pip, for instance, is 0,0001. If you multiply this by 1000, you will get $0,10. The most important currency pairs are priced to 4 decimal points, so the smallest change would be 1 pip.
To be able to say that you have made 50 pips on a trade, you would have had to profit by 50 pips.
So, why do pips matter in Forex trading?
Okay, so pips are important. We get that. The question now is: Just how important are pips in Forex trading? This is a tough question to answer. What you need to know is that the pip is not a measurement of your proficiency as a trader. As mentioned earlier, it represents a fractional change in price movement.
The pip of a movement enables you to calculate profit or loss. This translates into the fact that if you do not know the pip value, you cannot determine the right position for a trade and you risk placing too much confidence in yourself.
Pips protect Forex traders from significant loss. They can assign value to their profit targets and set stop-loss orders. Instead of just analyzing the price movements, they can pinpoint when their trading account will fluctuate as the currency market moves in one direction or the other.
No, you do not need a daily pip goal
People approach Forex to collect as many pips as possible a day from the foreign exchange markets. Some of them even come up with strategies to make a certain amount of pips a day. The outcome is that they set unrealistic goals and end up disappointed.
Professional Forex traders do not buy or sell currency with a specific number of pips in mind. They are aware of the fact that the foreign exchange market can be unpredictable at times, so professional traders do not count on specific numbers. What is more, they know that not all trades yield positive results.
Do not set a daily pip target. It is for your own good. You should better focus on your winning strategy. If you want to improve your experience when trading the global markets, choose a brokerage firm that offers variable spreads. Certain FX brokers have tight trading spreads from 0.0 pips, so traders have the opportunity to trade larger volumes and get access to the same pricing as banks, hedge funds, and financial institutions.
Look for a broker that offers a low pip spread if you want to trade in the Forex market and achieve profits. The low spread is not everything, but it does matter. Past performances are usually a guarantee of future results. The trading conditions of the broker do not change with time, which can be reassuring.
You do not have to calculate the pip value by yourself. The Forex broker will help you in this sense, but it is not a bad idea to familiarize yourself with the process. You must know the currency your account is denominated in, the currency pair you are trading, your position size, and the exchange rate. If you think that it is too complicated to do the math yourself, use a calculator.
Using pip value in Forex trading
No matter what you choose to do, it is important to have a solid plan in place and stick to it. You will be successful on occasions. However, do become overconfident. Forex traders have good days and bad days. Losing is an integral part of the game.
If you do lose, it is not because the broker did not do a good job or your trading strategy was wrong. The best strategies that have worked flawlessly can fail if changes occur. Remember that the foreign exchange market is unpredictable. Beating the market is not always possible.
Every aspect relating to the trading world is important, meaning that you cannot ignore pips. You need to know how many units you are risking per trade. Pay attention to the graphics and see how many pips each of the majors and their crosses are moving. In the absence of a precise calculation, you cannot accurately assess the risk that you are taking by holding a buy or sell position.
Have a successful trading plan, one that works in the financial markets. Trading is a business, according to the experts at Investopedia, which means that you need to take it seriously. Reading a couple of books and investing in a good charting program is not enough. Build a comprehensive, effective trading plan, and follow a disciplined approach. This way, you will survive year after year in the foreign exchange market.
If you want to profit from pips, follow proper risk management, and do not give in to the temptation of risking more than 2 percent of your trading account. You will lose everything that you have achieved until now.
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