Pips Expert Review by Brian Garvin and Jeff West

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"A Review of Pips and What Role They Play"

Every trader in the Foreign Exchange (Forex) market hopes to make a profit from something called a "pip". It may sound silly, but gains in pips can potentially make one very wealthy.

What is a pip?

Pip stands for "percentage in point". In Forex trading, a Pip is a unit of measurement which represents the smallest change in the price of currency or a currency pair. In the stock market this is classified as a "point". As a result, some folks refer to pips as points. Pips are the last decimal point in an exchange rate or currency pair.

For the majority of currencies a Pip is equal to 0.0001. This means that if you purchased USD/CHF at 1.2310 and sold at 1.2330, you made 20 pips. On the other hand, there are some currency pair exceptions. For example, the USD/JPY pair has only two decimal places making a pip equal to 0.01.

How much value does a pip have?

Despite different currency pairs and ever changing prices, the value of a Pip normally stays the same. When the USD is your base currency, you divide the pip (which is generally 0.0001) by the exchange rate.

So if the exchange rate for USD/CHF is 1.2548, then you calculate it like this:

0.0001 / 1.2548 = 0.0000796939

Now this might not look like a lot of profit at all but the key to earning money with Forex trading is leveraging smaller sums of money in order to move larger amounts of currency. This way, you can profit off of what seems like such a minuscule number at first.

If your broker allows you to trade with a leverage of 100:1, you can buy a standard $100,000 lot with only $1000 put down. If you are looking to boost the pip value so that you stand to gain or lose a more substantial sum of money you should trade in larger amounts. When you trade on $1000, your pip value is calculated like this:

0.0000796939 x 1000 = $0.08 per pip

You have made a profit of $160

Many Forex brokers provide online services to traders which automatically calculate the number of pips gained or lost depending on the position taken by the trader. Also, most brokers quote their spreads in terms of pips. A spread is the difference between the bid and the ask price of a currency pair. The spread is also the amount of money that the broker receives for helping with the trade. So the lower the spread is in terms of pips, the lower the broker gets paid which results in the trader keeping more of the profit.

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