The Significance of Pips in Forex Trading

Michael Fasogbon

Updated: 2 December 2023

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One of the gateways of being productive in forex trading is to understand the various concepts of foreign exchange.

For instance, the concept of pips is essential as it helps understand how the exchange rates move, how to manage the risks effectively, and how to calculate the loss and profit on a position.

However, a plethora of traders still lack a clear understanding of the importance of pips and hence placing a significant burden on the trader’s trading performance.

What’s a Pip?

To help you understand the clear importance of pips in trading, you must first understand what a pip is in forex trading.

It’s merely the smallest increment in the value of a currency pair. In most pairs, it’s often the fourth decimal place of the exchange rate.

However, with pairs involved with the Japanese Yen, pips are represented as one percentage point and are counted in the 2^nd place after the decimal in price quotes.

The Value

The value of these minor changes usually varies, and it depends in most cases on a trader’s lot size when trading with either yourself or with a forex mentor.

The difference in pips between the bid and ask is known as the spread, and it’s the value of how a broker makes money.

Therefore, when trading in forex, it’s always the best option to calculate the profits in terms of pips. When the trade is positive in terms of pips, then a trader is making a profit.

Most of the forex brokers make price quotes to one decimal place after the pip, and these divisions of the pips are known as pipettes, which allow flexibility on spreads.

Pips Value Changes

Mostly, the base value of a trader’s account is what determines the pip value change, and it applies to several currency pairs.

For instance, if you open a forex account dominated by the USD, the currency pair will be the US dollar, and it’s the quote currency in that particular account.

The pip value then will be $1 on the mini lot. Therefore, a trader can then easily monitor the changes in the pip value in the USD as it changes significantly by over 10%.

Basically, the base value determines the pip value of several currency pairs. As a trader, you’ll only be seeing changes in the pip value when only the USD change significantly by over 10% up or down.

Either way, the same will take place if the USD is the base currency or when not involved in that particular currency pair, like in the EUR/GBP.

Pip Relevance during Hedging

Forex trading is arguably the most significant financial market across the globe, and several folks are benefiting.

However, it requires a lot of strategies to become successful, and one of the trading styles is hedging.

Hedging is a position when a trader becomes free from risk as a broader spread strikes in both positions – a trader gets in a win-win situation. When brokers and traders are hedged, they all believe that they’ll be in a risk-free position.

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Conclusion

It’s not rocket science for any forex trader to notice that pips have got a great value. Like most aspects in forex trading, pips do have value and importance and hence justifies it all.

Several online sources will go around explaining the features as well as the significance of the pips. The most important thing is to master every detail to ensure a high success rate in the most volatile trading market.

The Significance of Pips in Forex Trading

Michael Fasogbon

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