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What is FX Trading, PIP and Pipette?

What is FX Trading?

Forex trading is the act of buying or selling foreign currencies. What makes it unique compared to other forms of investments or financial transactions is that Forex markets are open for 24 hours per day, 5 days out of 7. This means that you can start trading at any time you want (excluding weekends) and access liquidity when needed.

What is a Pip in Forex Trading?

A “pip” is the smallest possible change in a currency pair, which is equal to 0.0001 in decimal format (0.00001 for the JPY pairs). Pips are often used when forex traders discuss their profits or losses.

For example: If you buy the EUR/USD at 1.2000 and place your stop-loss at 1.1999, your loss is 100 pips. What is a lot of money if we’re talking about one pip? What you actually need to know is that forex traders do not generally deal with such small amounts: What they consider as a “small” loss or gain depends on the type of investors and strategies.

A Forex trader who uses the scalping technique, for example, deals with very small amounts, sometimes even with one-pip movements.

What are Leverage and Margin?

More money can be made using leverage than trading with your own funds. What exactly is margin? It’s just a portion of your own money that you’re willing to invest in the market. Why trade on margin, instead of paying for everything with your own money? The interest rate charged by a broker for using margin is much lower than the rate available from bank deposits. What this all means is that you can make significantly more profit, while spending less of your own money to do it.

What is Pipette?

“Pipette” is a slang term in forex trading that refers to a small price movement with a big impact. What kind of impact? It either means huge profits, or huge losses. What makes the pipette different from ordinary price movements is that they happen very quickly and in large quantities with bigger market orders, such as “stop-loss” or “take-profit” orders. What this means is that in order to avoid losses when opening a position, you need to set your stop-loss limit closer to the current price.

How to Calculate Pips in Forex Trading

Pips are calculated based on the following formula: (Bid Price – Ask Price) x Pip Value, which is then divided by 100 to give you one pip. What does this mean? What if your currency pair trades at 1.2050/1.2051 and you place a sell order for 10,000 units of the base currency (in this case, USD)? What is the pip value?

The pip value in this case would be calculated as follows: (1.2050 – 1.2051) x .0001 = .00005, which would then be divided by 100 to give you a final pip value of 0.005 cents ($0.005). What’s next? What if your stop-loss order for this position is at 1.2048, where the ask price equals 1.2051? What are you actually setting it to? The pipette has a value of 0.005 cents in this example, which means that your stop-loss would be moved to 1.2012 (1.2048 – 0.005).

What does this mean? What if your stop-loss would have originally been at 1.2045, instead of 1.2048? What are the exact numbers now? The pipette in this case would be 0.001 cents ($0.001), which means that your stop-loss would need to be at 1.2044 (1.2045 – 0.001).

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