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What is a Forex "PIP" and Why is it Important for Trading?PIPs are very important in the forex market. If you're new to forex, it's a word you'll be hearing often; as it's that one little word which literally makes to forex world turn; but what does it mean?
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PIP is short for percentage in point, and refers to the smallest shift a price can make on the trading market. It is generally the last decimal place you see on a typical forex quote. In most currencies, a PIP is 0.0001. There are some currencies like Japanese Yen however, that have two decimal places, so having a currency pair with Yen as the quote currency means that the PIP is equal to 0.01. PIPs look like they have no real value at first glance, but looks can be deceiving. Try to take into consideration that the bigger amount you trade, the more PIPs there will be. If it's looked at this way, you should be able to see how PIPs become the basis for determining your profit and loss. Their value varies, fluctuating with the exchange rates with the exception of the United States Dollar (USD) as your quote currency, where one PIP is equal to one PIP. With this in mind, how do you determine their value? To get the value of a PIP in a currency pair where USD is the base currency, all you need to do is to divide one PIP by the exchange rate. For example, if you have USD/EUR at 1.4285, dividing one PIP (0.0001) by 1.4285 will give you 0.0007. I know that number may sound insignificant, but try to keep in mind that with the more you trade, the greater increase to your overall profits. If there is a price change in PIPs, you can determine how much you can profit by. You simply multiply the PIP value by the amount of money you're going to be investing, and the result will be how much you can make per PIP. Using the example show above; if you invested $1000, you would be making around about $0.07 per PIP change. Although they're small on their own, PIPs prove to us that there really is strength in numbers. Once you've got the hang of multiplying tiny PIP values by the more moderate price changes, you'll be able to see the potential of forex currency trading.
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