Whenever you try to enroll for a forex trading course for beginners, you might come across the term pips. To know about their importance and dwell deeper into the details, we have to know what they are.
So, Pips in forex are a unit of measurement that is used to explain the currency change in the world of trading. Lets, take an example- if USD moves from 3.512 to 3.513, the 0.001 USD rise is a value equaling to one PIP. It is the last decimal place when quoting a price.
The value of these tiny changes may vary. It usually depends on what your lot size is when you are trading either with a forex mentor, or yourself. Usually, the difference in the pips between the ask and bid is called the spread. This spread value is the value of how your broker makes money. Most of the best broker for forex trading refrain from collecting an official commission and use pips to gain it, hence justifying its value.
If you are trading in the forex market, you should always calculate your profit in terms of pips. If your trade is positive in pips, you are making a good profit. If the pips are negative, you might be going down the drain. Various forex brokers also do fractional pips progression trades.
The fractional pips use even tighter control over your losses and profits. These also offer flexibility on spreads.
Pip Value changes
The Pip value change usually is determined by the base value of your account. This applies to several currency pairs. Let’s say you open an account dominated by USD. Your currency pair is the U.S. dollar and is the quote currency in the account. The pip value will be $ 1 on the mini lot. You can easily see the changes in the pip value in the U.S. dollar as it shall change significantly by more than 10 percent, either way. If the U.S. dollar is not involved in the pair, for example, say EUR,
The base value will determine the pip value of many currency pairs. If you open a USD-denominated account then Forex currency pairs where the U.S. dollar is the second currency, the pip value will always be $1 on a mini lot. You would only see changes in the pip value if the USD changed significantly by more 10 percent up or down, and if the USD is the base currency or is not involved in the currency pair, such as in EUR/GBP.
PIP relevance during the hedging
Hedging is a position when you become free from risk as a widening spread eats in both positions. Or in simple words, you come in a win-win situation. Many traders or brokers have faith that they will be in a risk-free position when they are hedged.
However, when you face an aggressive event when there is a large change in a currency such as the Swiss National the CHF into the euro, the difference between the bid and ask can widen. And it can go up to more than 100 pups in liquid pairs. This is also possible in case of massive aftermath such as that of the EU referendum leading to Brexit.
As one can easily notice, pips have great value. Well, every aspect has value and importance in the Forex trading world. We can’t ignore even a single of them. And pips have a great value to justify them. Many forex trading training videos make it a point to explain the novice, the features, and the importance of these pips. If you master these tiny details, you can ensure your success rate in the volatile trading market.