“I just made 100 PIPs on GBPUSD, I’m done for the week”
We often hear the word “PIP” get thrown around but what does it really mean? I once wondered why FOREX traders are so interested in making PIPs instead of making money, until I understood how movements in the markets can be measured with PIPs.
Price Interest Point (PIP) is the universal standard unit of measurement in the FOREX markets. For most pairs, standard or otherwise, a PIP change is a change in unit of the 4th decimal place. But for the Japanese Yen pairs, a PIP change is a change in unit of the 2nd decimal place.
Let’s look at some examples of price movements in PIPs
EURUSD: 1.2300 – 1.2350 = 50 PIPs (0.0001 *50)
USDJPY : 106.00 – 106.75 = 75 PIPs (0.01 * 75)
So depending on the lot size (quantity traded), a PIP movement could carry a significant dollar amount. Typically, a standard lot on EURUSD is about USD$10/PIP. So if the pair moves 50 PIPs in your favor, you make $500 in profits, vice versa.
Beginners are not recommended to use standard lots. Today, brokers offer micro and nano lots which translate into $1 and $0.1 per PIP respectively. In fact, beginners should trade on a demo account for at least 12 months before deciding to go LIVE.
So here’s what a PIP is! Next time you hear someone talking about how many PIPs they’ve made, I’m sure you’ll get an idea of the magnitude of the price move like a real FOREX trader!
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Till next week, have a good weekend!