Pips In CFD & Forex
The Concept Of Pips In Forex
One of the basic notions in forex marketing is the concept of pips and it is crucial to become acquainted with them in order to understand the online trading of currencies and to comprehend the various types of analysis and signals found on the internet. Let’s look further into this concept with the help of simple explanations and a solid example.
What Is A Pip?
The smallest value of a variation in the movement of a cross, or currency pair, is called a “pip” and stands for “percentage in point”.
Thanks to the value of pips, it is possible to easily calculate and determine the fluctuation of a currency pair.
As we know, the majority of crosses are written in the form of 1.1850, to four decimal points. If the movement of such a price fluctuates to 1.1851, the pip is represented by the last decimal place.
For a decimal shift of 0.0001, the pip is equal to 1.
The value of the pip can be calculated as follows:
For any given position, simply multiply the amount on the position by the value of one pip, or rather, by 0.0001.
Stated more clearly, in the case of a trade, the value of a pip corresponds to the sum of your profit or loss.
Pay attention when calculating the amount of profit, as you need to deduct from the difference in the number of pips, the spread applied by the broker, which is also expressed in pips.
Here is a simple example:
We place a trade for an upward position with 100€ on the EUR/USD at the price of 1.3200. Your broker applies a spread of 4 pips. After a few hours, you decide to close your position at the price of 1.3250.
We can now simply calculate that the value of the spread that corresponds to the commission taken by the broker is of 0.0004 per unit traded.
Your profit is then calculated as follows:
Profit = [Investment Amount x (entry price – closing price)] – (Investment Amount x spread)
Profit = [100 x (1.3250 – 1.3200)] – (100 x 0.0004)
Profit = (100 x 0.0050) – 0.04
Profit = 0.5 – 0.04 = 0.46
If you are using leverage of 1:400, your profit is then 400 x 0.46, or 184€.