Getting into forex trading requires a lot of research. If you’re getting into it, you must’ve heard of the term PIP stock. Do you know what it is?
To be successful in forex trading, you must understand this unit. If you’re here it means that you want to learn about what is PIP in Forex. It might sound like something complex but, you shouldn’t worry.
We’ll tell you all there’s to know about PIPs and why you should care. Want to learn more?
PIP Stock: What You Didn’t Know You Didn’t Know
If you’ve been investing in different markets for a while, you must’ve heard the term PIP. But, does it mean the same in all markets?
In stock trading, it refers to the price change. Yet, this term isn’t used by stock traders or investors a lot because of how that market works.
For stocks, a single shift in price isn’t noteworthy. Yet in forex trading, it’s a different game.
What Is a PIP in the Forex Market?
A PIP in the forex market is a small measure of price change. You might be asking yourself, what does PIP stand for? It stands for a point in a percentage.
PIPs are measured based on the quote or underlying currency. It will depend on the currency pair you’re trading. In most currencies, a PIP is a 1/100th of 1 percent.
That measurement is the same as when your loan lender adds or deducts a basis point from your interest rate. When you’re trading forex, a PIP can be 0.0001 in most USD currency pairs.
If you’re trading a GDP/USD pair, you believe that the price is going up. So you enter a long position for this pair at 1.6500 and, it closes at 1.6550. You made a 50 PIP profit on that trade.
You can earn profits on short positions too. Remember that when you enter a short position, you’re betting on the price going down. An example is if you decided to enter a short position for a GDP/USD pair.
You entered the position at 1.6500 and, it closes at 1.6450. The price went down and, you earned a 50 PIP profit. Yet, not all currency pairs are at 4 decimal places.
Some currency pairs like GBP/JPY are at two decimal places. An example is when you enter a long position for GBP/JPY at 172.87 and, it closes at 173.24. You earn 37 PIPs on that trade.
How to Calculate the Value of a PIP?
The value of the PIP will depend on the currency pair you’re trading. Like we mentioned before, some PIPs are at 2 or 4 decimal places. You can calculate the value per PIP by dividing 1 PIP over the exchange rate.
An example would be when the exchange rate for USD/CHF is 1.0810. The value of a PIP is going to be 0.0001 divided by 1.0810. A PIP will be equal to 0.00009250.
Should You Care About PIPs?
Yes, you should care about PIP stock. Changes in PIPs can turn into losses. Also, most brokers will charge PIPs for their services.
So you must understand PIPs to calculate your spread. Remember that your spread will let you know how much you can profit from your trade. The more profitable trades you place, the more your account will grow.
Want to learn more about how forex trading works? Check out our blog post to learn more.