Pip

A pip, short for “percentage in point” or “price interest point,” is a unit of measure used in the forex market to represent the smallest change in value between two currencies. One pip is typically equal to 0.0001 for currency pairs where the USD is the quote currency, and 0.01 for currency pairs where the USD is the base currency. 

Pips are used by traders to calculate the profit or loss on a trade, as well as to determine the appropriate level for setting a stop-loss or take-profit order. To calculate the value of a pip, a trader would use the following formula:

(Pip value in quote currency) = (Size of trade) x (1 pip) / (Exchange rate)

For example, if a trader buys 1 lot of EUR/USD at an exchange rate of 1.20 and the pair moves in the trader’s favor by 10 pips to 1.21, the value of the trade would be:

(Pip value in USD) = (100,000 EUR) x (0.0001) / (1.21) = $8.26

In this example, the trader would have made a profit of $8.26.

Traders use pips to make trading decisions and manage risk. Pips are used to calculate the profit or loss on a trade, as well as to determine the appropriate level for setting a stop-loss or take-profit order. A stop-loss order is an order that is placed to automatically close a trade if the market moves against the trader, while a take-profit order is an order placed to automatically close a trade when the market moves in the trader’s favor. For example, a trader might enter a long position in EUR/USD at 1.20 with a stop-loss set at 1.19 and a take-profit set at 1.21. If the price of the pair reaches 1.21, the trader would close the position and realize a profit of 10 pips. If the price falls to 1.19, the trader would close the position to limit their losses.

In summary, a pip is the smallest unit of measure in the forex market, used to calculate profit and loss, and set stop-loss and take-profit levels. Traders use pips to make trading decisions and manage risk.