What is pips in forex?
A pip is the smallest difference that a specific rate can undergo. It is the tiniest raise of a currency in foreign trading. Most currencies are rated in four decimal places, the pip is the difference in the fourth decimal. Usually this is the same as 1/100 of 1% or simply said, a single basis point.
In foreign exchange, the biggest market of finance in the world, with a turnover of over 1.5 trillion daily it is inevitable that Forex traders should recognize the miniature changes while navigating the graphs to when to invest or when to pull out. Or just to predict the pattern of flow. Foreign currencies are floated in a pair e.g. dollar vs. the Japanese yen and so on
A pip is the simplest value that is sold and bought for currencies. Most of them except the Japanese yen which is traded at two decimal places, other currencies are traded at four decimal places.
Formula for calculating pip
Formula is (1 pip/currency exchange rate*notional amount) for GBP/USD, I pip =0.0001. if the exchange rate of the currency is 1.7204, notional amount is GBP 100, 000.
Hence, (0.0001/1.7204*100, 000=0.58 GBP
When you change it back to US dollar, then GBP 0.58*1.7204 which comes to 1 US dollar.
For EUR/JPY, a pip value is 0.01. Assuming currency
Source: Make Money With Forex
Forex Strategy 10: Low Risk/High Return Currency Trading
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With a daily trading volume that is 50x larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies in the FX markets. The liquidity of this market, especially that of the major currencies, helps ensure price stability. Investors can always open or close a position, and more importantly, receive a fair market price. Because of the lower trading volume, investors in the stock market and other exchange-traded markets are more vulnerable to liquidity risk, which results in a wider dealing spread or larger price movements in response to any relatively large transaction.
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