What is a pip in Forex and are they useful?

You might just use your intuition alone to make calls during Forex trading. A lot of people do that, and some succeed. But if you want to really read into your decisions and their consequences, you’ll have to:

  1. Pay attention
  2. Monitor your pips
  3. Register the consequences.

The first and the last steps are rather easy. The registering part is done for you on many exchanges, actually. The results are getting archived in your trading history, and it’s important to remember what you did to win or lose. It’ll allow you to understand the current situation better, as well as what different calls in different moments do.

Pips show these calls and their consequences in numerical volumes if you want to know exactly what’s going on. You would like to see that if you want to be a professional trader. So, what is a pip in Forex?

What are pips, exactly?

What is a pip in Forex and are they useful?

Forex pip definition is this: pip is a variable used by the traders to measure the cost changes for various products. It’s a major parameter and is used universally.

1 pip refers to the smallest cost volume available on display. Most Forex exchanges display 4 decimal digits after a primary number (for instance: 4.1234).  So, if this number changed from 4.1234 to 4.1233, the change would be 1 pip. Consequentially, the change from 4.1234 to 4.1134 would be 100 pips, and so forth.

Pips can be negative, as well as positive. Most often, however, people look for negative pips because of the purpose they serve. But what is a pip in Forex in terms of using them?

Where are pips used?

Pip in currency trading as a parameter is mostly used for several purposes:

  1. Calculating the loss of profits between the purchase & sale
  2. Calculating the change in product’s cost.

Primarily, you’ll see pip numbers around spread information. Spread is basically a difference between the buying price and the selling price of the same product. This parameter often refers to a specific type and quantity of product you’re buying and selling.

Spreads, not surprisingly, are measured in pips. It’s the most convenient way of measuring these precisely because pips are usually very small, and the value differences aren’t supposed to be big within the same product. 

Oftentimes, you’ll see the average spreads on a particular product displayed on the very exchange. It’s pretty common to see these things while trading Forex. These parameters show your projected losses should you buy and then sell the currency.

You can also just as easily use pips when projecting any sort of loss or growth. To this end, if the number has decimal numbers, you’ll be able to estimate its change with pips. That includes profits, product value, losses, your balance, and so forth. That being said, pips are still more commonly used to measure spreads.

How useful are pips?

Pips are a universal tool for measuring small changes in trading. In this capacity, it’s absolutely indispensable. 

Granted, some people find more use for them than others. The most obvious use is that you’ll be able to see just how much you will make or lose (or already did) trading any particular currency. If an exchange has a list of average spreads for each currency pair, you’ll be able to pick the least risky options.

But you can do more. You can see how many pips were lost or gained from each of your decisions, including waiting, buying more, selling partially, and so forth. Of course, these changes are also reflective of the situation in the market, so you’ll have to compare these results and the larger-scale events to get a clearer picture.

For truly large-scale changes, you’ll likely be using percentages because pips are meant for much smaller changes where percentages don’t make much sense. So, you’ll still be able to compare both your decisions and the changes on the market on this medium scale.

But then again, calculating this sort of information is a professional-tier activity. You don’t really need or want to do it if you don’t care that much about tracking all of your money or if you don’t trade in big enough volumes to care about side losses that can’t be helped.

In conclusion

What is a pip in Forex? Pips are extremely important if you know how to read them and make them useful for your strategy and general trading behavior. However, if you’re either a small-time or a beginner trader, you won’t need these as much. In the end, it’s not really your choice to use or not use them because they are just there. Using them in-depth, however, is another issue completely.

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author

Carolyn Huntington is an economist, professional trader, and analyst. She made her first big deal in her student years with a profitable investment in Facebook stock. Now the total experience of her trade is 18 years. Over the years of trading, Carolyn has developed its own strategy that allows even those who have never traded on the stock exchange before to earn money. She also creates market forecasts and advises major shareholders, compiles investment portfolios, and teaches how to work with automated advisors.

telephone: 503-547-5192