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jobalertshopForex trading is a popular investment avenue that requires a lot of knowledge, experience, and hard work. The foreign exchange market is the largest financial market in the world, with trillions of dollars traded every day. In forex trading, there are certain terminologies that are quite essential for understanding the market and making informed trades. Pips and points are two such terms that are commonly used in forex trading. This article will provide a comprehensive understanding of pips vs. points and how they are used in forex trading.
What is a PIP?
A PIP stands for “percentage in point” and is a unit of measurement that represents the smallest price movement in forex trading. It is the fourth decimal point in most currency pairs, except for those that involves the Japanese yen. In yen-based currency pairs, the PIP is defined as the second decimal point. The PIP is used by traders to measure the potential profit or loss of a trade. The value of a PIP depends on the lot size of the trade and the currency pair being traded.
The lot size refers to the amount of currency being traded in a single trade. It is measured in standard, mini, and micro lots. A standard lot represents 100,000 units of the base currency, a mini lot equals 10,000 units, and a micro lot is just 1,000 units. For example, if you buy 1 standard lot of EUR/USD at 1.2000 and sell it at 1.2010, the price moved by 10 PIPs. If you bought 1 mini lot of the same currency pair, the price move of 10 PIPs would result in a profit or loss of $1.
The value of a PIP is also dependent on the currency pair being traded. In general, the PIP for currency pairs with USD as the base currency is relatively small because the USD is considered the reserve currency of the world. On the other hand, PIPs for currency pairs without USD as the base currency are generally larger.
What is a POINT?
A point is another unit of measurement used in forex trading, but it is not as commonly used as PIPs. A point is the same as a PIP, but it is used to describe price movements in equity and futures markets. In these markets, percentage movements are represented by points. The value of a point is dependent on the market being traded and varies between different trading instruments.
For example, in the E-Mini S&P 500 futures market, a point represents a movement of $50 in the contract value. In this case, a 10-point movement in the S&P 500 futures market would equate to a $500 gain or loss.
Pips vs. Points
Pips and points are both units of measurement used in forex trading to measure price movements. However, the two terms are used in different trading environments. PIPs are commonly used in the forex market, while points are used in equity and futures markets. They both represent small price changes or movements, allowing traders to measure potential profits or losses in trades.
The value of a PIP or point is dependent on the lot size and the currency pair or market being traded. In general, PIPs for currency pairs with USD as the base currency are small, while PIPs for currency pairs without USD as the base currency are relatively larger. The value of a point in equity and futures markets varies based on the trading instrument.
How to Calculate PIPs and Points?
Calculating PIPs and points is an essential part of forex trading. To calculate the PIP value, you need to know the lot size and the currency pair being traded. The calculation can vary depending on the currency pair being traded, and there are different formulas for each scenario.
For example, to calculate the PIP value in USD-based currency pairs, you can use the following formula:
PIP Value = (0.0001 ÷ Exchange Rate) x Lot Size
Let’s say you buy 1 standard lot of EUR/USD at 1.2000, and the price moves by 10 PIPs. To calculate the profit or loss, you need to know the PIP value. Using the formula above, we can calculate the PIP value as follows:
PIP Value = (0.0001 ÷ 1.2000) x 100,000 = $8.33
Therefore, if the price moved by 10 PIPs, your profit or loss would be $83.30.
To calculate the point value in equity and futures markets, you need to know the contract size and the tick size of the trading instrument. The tick size represents the minimum price movement of the trading instrument. For example, the tick size for the E-Mini S&P 500 futures contract is 0.25.
Point Value = (Contract Size x Tick Size)/ 100
For instance, if you trade one E-Mini S&P 500 futures contract, the contract size is $50 x Index Value, and the tick size is 0.25. Let’s say the index value is 3400. Using the formula above, we can calculate the point value as follows:
Point Value = ($50 x Index Value x Tick Size)/ 100 = ($50 x 3400 x 0.25)/100 = $425
Therefore, if the price moves by 10 points, your profit or loss would be $4,250.
Conclusion
In conclusion, forex trading involves various terminologies that are essential for traders to understand. Pips and points are two such terms used to measure price movements in forex, equity, and futures markets. The value of a PIP or point is dependent on the lot size and the currency pair or market being traded. Both PIPs and points allow traders to measure potential profits or losses in trades, making them critical in forex trading. Therefore, it is essential to understand the difference between these two measurements and how to calculate them.
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