Before trading, it is essential for traders to clearly understand the concept of Point in Percentage (or pip), so that they can easily calculate their profits and losses.
PIP - Pip means percentage in points. This is the smallest price increment a currency can make. In Forex, prices are quoted up to the 4th decimal point, which is 1/100th of a cent. Most of the pairs in Forex market are quoted to 4 decimal points (.0001); however there is an exception with the Japanese Yen for which prices are quoted only to two decimal points. For instance:-
1. EUR/USD- The pair is traded at 1.3568 and if the pair moves from 1.3568 to 1.3569, then the movement in the pair is 1 pip. In the same way, if the pair moves further up to 1.3588, then the movements in the pair is equivalent to 20 pips.
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2. USD/JPY- In the USD/JPY, prices are quoted up to 2 decimal points like 95.65, 98.89. If the pair is traded at 95.65 and rises up to 95.66; it shows an increase in the pair movement of 1 pip.
Lot Size- Spot Forex markets are traded in lots. The standard size of a lot is 100,000 units. A 'mini' lots are also available with some brokers, which is equal to 10,000 units each. A 'micro' lots consists of 1,000 units, but this lot size is not always available.
Calculation of pip value:
Formula Pip Value = (One pip/exchange rate) * lot size
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