FOREX pips are one of the most important aspects of the market. Every FOREX trader has gaining pips at the top of their priority list. While many people are vaguely familiar with the FOREX market in general, they may not fully understand what pips are. Here are the basics of pips in the FOREX market.

What Pips Are

FOREX trading is all about the relationship of foreign currencies. When you deal in the foreign exchange market, you are always buying one currency while simultaneously selling another. When one currency goes up, the other one goes down.

Since the essence of the FOREX market is comparing one currency to the other, it becomes necessary to have a basic unit by which to compare movements. Therefore, when a movement takes place in the market, the most basic unit that the movement is measured with is called a pip.

When you are looking at a price feed for a regular FOREX broker, a pip represents the fourth decimal place. Therefore .0001 equals one single pip. If you are dealing with a five digit broker, they deal with fractional pips. Therefore .00012 would be 1.2 pips. One is just more exact than the other. 

Trading

Pips are the most effective indicator of whether or not a trading strategy works. You can not accurately compare trading strategies by examining the amount of income made from each trade. Depending on the lot size of the trade, the numbers could be skewed. For example, if you trade 1 full lot, it only takes 10 pips worth of movement in the currency pair to produce a $100 profit. By comparison, if you are trading .1 lots, it will take 100 pips worth of movement to make $100. 

You can always adjust the size of the lots when you are sure that you have a winning strategy. However, you would rather have the trading strategy that wins the most pips consistently. When you learn how to make pips on a consistent basis, you will have a very effective trading strategy.

Spreads

When you trade FOREX, you will also have to deal with spreads. In order to trade in the FOREX market, you will have to open a trading account with a FOREX broker. FOREX brokers are in business to make money. Therefore, they use what is called a spread to collect their fees. 

For example, let's say that on the EUR/CHF currency pair, the spread was 3 with your FOREX broker. This means that they will collect three pips off of the trade for placing it for you. 

Calculating Profits

Pips also help you calculate your profits and losses. When your trading account is held in U.S. dollars and you trade 1 lot, most of the time one pip will equal $10.00. Therefore, if you make 25 pips, you will have made $250. You can adjust those figures up or down by multiples of 10 depending on whether you trade .1 or .01 lots. 

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