When you are first getting started with trading currency and forex you may be intimidated by the amount of new terminology that you have to learn before you can fully comprehend and analyze particular markets and make smart decisions. One of the terms that most novice traders continuously hear about yet have difficulty interpreting is the forex pip, and how forex pips fit into the big picture while trading forex. The truth is that a forex pip isn't really that difficult to understand, and the basic concept behind a forex pip is very simple.
Forex pips are essentially the smallest unit of measurement that a particular currency can be measured in. Pip stands for "percentage in point", and the best way to understand what a forex pip is by looking at an example. The majority currency pairs display a pip that is at 0.0001Ã¢Â€Â”so for instance if you just traded EUR/USD at 2.8679 and it sold at 2.869 you just made eleven pips. It is pretty much that simple and while the term pip may not make sense at first, once you start trading currency pairs the terms pip and pips are going to become second nature to you. Forex trading pips are extremely important when trading currency because without them it would be very difficult to measure the differences in the value of currency.
Forex pips can also provide you with the value of any currency pair if you know how to perform the appropriate calculation. The formula is actually really simple as long as you know the base currency, the exchange rate, and the pip value. If for example you are trading USD/AUD then the pip value would be at 0.0001 with an exchange rate that might be at 1.3454. To get the real value of the pip you simply divide 0.0001 by the exchange rate to get what the value of the pip is. You are going to get a very small number and you shouldn't worry as this is to be expected and you should always remember that the actual number isn't of any real consequence, and it is rather the fluctuations and overall volume of trades that will make you money in forex.
Once you have a firm grasp on what a forex pip is then you can confidently analyze the value of currency pairs so that you can make better decisions going forward. Various brokerages will advertise that they can offer you forex 2 pips in an effort to get you in the door. These brokerages may be able to deliver on such promises but in all likelihood you are going to have to personally ensure the provision of such a spread. Getting even a forex 1 pip spread can be difficult, and the only way to really make more money and avoid scalping forex pips is to analyze your positions correctly without getting trapped into any one strategy that may not be yielding a significant return. This way you can establish the appropriate pip spread without using up too much of your bankroll too soon and without becoming subject to a forex margin call. Once you start working with pips on a regular basis you should be able to better analyze all sorts of forex data on a much higher level, and this will hopefully make you more money in the long run.
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