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How Forex Pips Work

By Edited Nov 13, 2013 0 0

When you first start trading Forex, one of the most confusing aspects can be figuring out how much money you make or how much money you lose on a particular trade. This can mean a lot of wasted time spent thinking about the mechanics rather than thinking about the trade itself. In order to understand what kind of a profit you will experience on any particular trade, you have to understand exactly how pips work. This means taking a look at what size lot you are using and how that will affect your profit margins.

A pip is literally 1/100 of a penny. We use this in Forex trading to measure our profits. When you are trading a single lot, a single pip accounts for $10 worth of profit or loss. This is true when you are trading based on a dollar as your counter currency. So in order to calculate what the single pip is worth when trading Forex, you have to understand exactly what your counter currency is.

So if you are trading the EUR/GBP, then you have to measure the prophet of your pips in terms of the Great Britain Pound. So if you manage to acquire 15 pips on a single trade, this means that you have made 15 Great Britain pounds if you are trading a mini lot. If you're trading a full lot, this means that you made 150 Great Britain pounds.

Just keep in mind that you need to calculate your profits based on the spread. If the spread of your currency is four pips, then you need to subtract four pips from any amount you would make. That means that the 15 tapes you made on previous trade only amount to 11 pips. Keep this in mind when trading and try to find a broker that has very small spreads that you can maximize your profits. This will allow you to keep more of the money you make and will keep you out of trouble by making profits a lot more easy and risk a lot less.


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