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What are Pips? [Forex Trading]

Updated on January 10, 2013
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Starting on Forex

What are pips? I remember when I was starting on forex - it is a confusing world full of mathematical equations and strange terms like pips, lots, spreads, long positions, short positions, bear and bull market and all those words that make you unsure about whether you got what it takes to be a forex trader.

I'm trying to do some legwork for you by explaining pips the way I liked people to have explained to me back then when I was a total forex noob (that's a rookie in computer language).

Read on and make sure you comment if you are in any doubts.

What does pip mean?

Well, basically the pip is the change between two currencies. It is usually the last decimal house of a quotation. There is also the term pipette, but that is a fractional pip and thus it is another story.

Pip stands for percentage in point and if you want to determine the pip value of your account currency you simply have to calculate this: Divide the found pip value by the exchange rate of your account currency and the other currency in question - this is not usually required, most brokers have these calculations already made.

There are a lot of calculus that involve the pip variable so if you find yourself having doubts about this simply google for one of the lots of Pip Value Calculators online - nobody hand calculates pips anymore anyways.

Summing

Name
Meaning
Pip
Percentage in Point
Pipette
Fractional Pip
Source

Pips and Lots

There are some values that you can keep in your head as a reference.

Taking the EUR/USD as a reference, for obvious reasons, the value for the pip on standard lots are always $10, this number gets down to $1 if we are talking about mini-lots and to a tiny $0.10 at micro-lots proportions.

An advice: If you were reading this and learning something, you might have to study before you get into forex. Forex is a lucrative business but it's risky and preparation is key. Study hard before you sink your teeth - this is not as easy as most brokers make it appear!

Info for EUR/USD

Lot
Pip Value
 
Standard
$10
 
Mini
$1
 
Micro
$0.10
 

What are Lots?

Now you are saying: "Ok, ok.... I admit I have lots of study to do, but what are lots?".

Well, Lots are standard units of size for each transaction. Different brokers have different conditions regarding lots and some of them allow you to transact even to the size of a single unit.

Generally speaking tough, there are standard lots that stick to 100,000 units, mini-lots downsize the number to 10,000 and you have a micro-lot of 1000 units.

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A final note about forex for newbies

I've lost count of the amount of people that come to me seeking help to begin in forex because they think it is easy and a sure-shot. This is wrong! Listen to me, forex brokers earn commissions and they want to cash in as much as they can, so they paint forex pink and gold and promise everything - hell, even more if you get some referrals.

Now, the only way you are going to get some money out of Forex Trading is by understanding the Market! I write Market with a capital "M" because the Market will be your God on Forex - it commands everything. You got to read the economic news everyday, you have got to dominate the financial and technical aspects of forex trading and you must know yourself and your limits.

Do not think it will be easy, but you have to fight for your dreams.

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    • Rui Carreira profile image
      Author

      Rui Carreira 5 years ago from Torres Novas

      Well... just contact me then :) Thanks for the comment Msmillar.

    • Rui Carreira profile image
      Author

      Rui Carreira 5 years ago from Torres Novas

      Yeap... you got to have discipline and willpower! Don't feel bad though, even I lack the discipline sometimes - but when I do, I get punished by missed opportunities.

    • Msmillar profile image

      Joanna 5 years ago from Valley Springs

      I've been waiting a long time to meet someone that knows what they are talking about in the Market, and here you are, a fellow HubBuddy! I have a question for you but its not one I wish to advertise.....

    • monicamelendez profile image

      monicamelendez 5 years ago from Salt Lake City

      I've been wanting to get back into trading for a while now. I traded quite a bit back in the day but I didn't develop enough discipline at the time to make it work