Pretty Much Everything You Need To Know About the FX Pips

 

picture of the Dollar and the Philippines money in a Grand scheme of the Fx Pips

In the Forex market, the term “PIP” or Point In Percentage is defined as the unit of measurement for the smallest change in the value of a currency, or the smallest exchange rate fluctuation in a currency pair.

This is how traders measure their profit or losses in Forex.

So, if you are planning to speculate in Fx marketplace, it is very important that you learn everything there is to know about the Fx PIPs.

 

What Exactly Is The Value Of One PIP?

photo of the various small coins representing the Fx Pips

The value of currency in Forex trading is given in PIPs, and 1 PIP is equivalent to 0.0001, 2 PIPS are equivalent to 0.0002, and so on. One PIP is the smallest percentage point change that an exchange rate can make. So, if you have bought United States Dollar (USD) for Swiss Franc (CHF) at 1.2475 and sold it at 1.2489, you’ve made 14 PIPs.

In general, most currencies are usually priced to four numbers after the decimal point. For instance, a five spread for EUR/USD is 1.2530/1.2535. In all the major currencies, it is only the price of the Japanese Yen that doesn’t have four numbers after the decimal point.

For example, let’s consider the exchange between United Stated Dollar and Japanese Yen. In USD/JPY, the price is usually given in to two decimal points, so the exchange between USD/JPY will look like this: 114.05/114.08. This quote has a three pip spread between the buying and the selling price.

 

What Are Spreads?

In the Fx marketplace, the spread is defined as the difference between the bidding price (the buying price) and the asking price (selling price). In order to have a currency pair, there must be two prices. The spread is simply the difference between what the market marker offers to buy from the trader, and what the market maker offers to sell to the trader.

So, if a trader buys any currency from the market and sells it immediately making no change in the exchange rate, he or she will lose money. Why? Because, the amount spent in buying the currency will be more than the amount received in the selling of the currency.

 

Determining the Fx PIPs Value

There are actually three important factors affecting the value of each PIP-the exchange rate, the size of the trade, and the currency pair being traded. In this light, the change in one factor can have a serious effect on the monetary value of the open position.

old-fashioned counting machine in a store when counting the Fx Pips

For example, given that a $500,000 trade involving the United States Dollar and Swiss Franc (USD/CHF) is closed at 1.0192 after netting us 50 pips. To determine the amount of profit made in USD, you will have to look at the following procedure.

First, find out the number of CHF that each PIP represents as follows:

500,000 x 0.0001 = 50 CHF per pip

The next step is to find out the amount of USD that each PIP represents as follows:

50 ÷ 1.0192 = 49.05 USD per pip

Now, to find out the total profit that was achieved in USD, you will have to multiply the total amount of PIPs captured by the value of USD per PIP as follows:

50 x 49.05 = $2452.50 USD profit.

 

The Bottom Line

During the Market hours the Fx PIPs are never in a stable state; they keep on changing according to the market fluctuations.

Gladly for us, this time-consuming calculation, as to how determine the value of a PIP, is done automatically by the electronic trading platforms.

Also, most Brokers have a table of PIP valuation on their website for a particular currency pair.

Life, of a trader, is good in a 21-St Century!

How To Choose The Best FOREX Trading Software

microchip for automated trading

We are moving into a world which is increasingly automated. Currency trading is no exception. FOREX trading software enables traders to identify and execute portable trades without constant supervision.

These software programs comb financial markets to find probable trading situations and then make trades using parameters predetermined by the trader or by the designers of the software. Here is the short list of some trading strategies that are being used by the software designers:

Trend Following

Determining the overall direction of the trading instrument by analyzing multiple time-frames along with complex math calculations.

Mean Reversion

Taking advantage of deviations from the mean, the average price. Most of the time it is two or three standard deviations that are used to determine if the price is in the oversold/overbought conditions.

Scalping

Refers to trading on shortest time-frames by capturing smallest moves. Trades are executed within minutes or even milliseconds.

Arbitrage

Exploiting a price difference, the disparity between the Markets, or between several trading instruments, in our case – currencies. It is considered to be a risk-free opportunity. While automated trading can be extremely useful, it is not a “silver bullet” for becoming a profitable trader. Read on to find out how FOREX trading software works and how it can be best applied to profitable trading.

 

How Does Trading Software Work

Algorithmic trading programs work by scanning buying and selling activity and price charts. The software uses this data to identify signals which suggest that there is a profitable trading situation. When the trading software had identified that a specific criteria for a profitable trade, it will automatically execute a buy or sell order.

 

The Benefits Of Trading Software

FOREX trading software programs have a number of advantages over traditional human led trading. The most important of these is an entirely rational and detached approach to trading.

Most traders will tell you that winning the psychological game is one of the most important aspects of becoming a successful trader. Computer programs are completely unemotional, neither prone to fear or greed, which plague human traders. Instead, they trade entirely according to preset criteria.

financial market, driven by the algorithmic robots

Human traders are not just limited by their emotions. No matter how driven a trader is, he, or she still needs to sleep, eat and rest.

A computerized trader in contrast, can trade around the clock. Using a computer program trader is able to trade multiple markets and execute trades constantly.

Computer programs can execute trades instantly when the correct parameters are met.

 

The time required to capitalize on profitable trading situations becomes shorter every single year. Using some form of trading software is therefore almost essential in today’s market.

 

Disadvantage of Trading Software

In computer science, there is a phrase “Garbage in, Garbage Out.” What this means is that the output you receive from a computer program, is only as good as the information that you feed in. This is an important concept to keep in mind when selecting a program trading software.

Not all trading software is the same. The results you achieve will only be as good as the software is designed. While there are many good trading software packages available, there are equally as many that will cause you to lose money.

Make sure that you check carefully that any trading claims are backed by an authenticated history of successful trades.

 

Testing The Software

A number of trading software packages allow you to test the program before choosing to buy it. If this is available you should take advantage. This is the best way to make sure that you will be able to install and trade using the software.

It’s a good opportunity to have any questions answered by support staff. You should also become familiar with all of the specific features of the software. If you aren’t completely comfortable with the software and feel that it will improve your trading, then just pass on it.

testing of statistical arbitrage in the soundproof room

Conclusion

There are many FOREX trading software packages available. Before buying test the software and look at customer reviews from different sources.

Make sure that there is good ongoing customer support. Finally, make sure that the software works with the currency markets that you trade.

A good FOREX trading program can significantly up your trading game. Keep in mind that there is no software that can completely guarantee profitable trading and so you need to consistently monitor the results it produces.

 

 

Photo credits:

By Erik Lucero, Martinis Group, University of California,
Santa Barbara – Homepage Martinis Group, University of California, Santa Barbara: http://www.physics.ucsb.edu/~martinisgroup/index.shtml, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=12518228
By Glogger (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0) or GFDL (http://www.gnu.org/copyleft/fdl.html)], via Wikimedia Commons
Consumer Reports [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons

 

Introduction To Hedging FOREX: How To Use Hedging In Your FOREX Trades.

a foreign exchange risk control medkit

Hedge fund trader Mark Sellers once remarked that if you “focus on the downside, the upside will take care of itself”. Protecting against adverse currency movements is essential for long term trading profitability. Hedging is a way that FOREX speculators can control their foreign exchange risk.

When used correctly hedging can protect against both long and short currency risk. Here we will look at how hedging foreign currencies works, and why it can help you to control risk in your trading.

What Is Hedging?

Hedging can be used by a trader to protect against a down movement in a currency pair that they have gone long. Hedging also can be used to protect against upward movement in a trade where they have gone short. While there are different ways for speculators to hedge their trades, the most popular are  forward contracts and well known foreign currency options.

foreign currencies specialist at his workplace

Hedging Forex Trades Using Currency Options

One of the most popular ways for retail traders to hedge forex is using a currency option. A currency option provides the purchaser with the right, but not an obligation, to buy or sell a particular currency pair at a specific exchange rate in the future.

For example, you may be in a long trade position. You want to protect against potential downside risk, while still being able to profit from your projected upwards movement in the currency pair. In this situation you might choose to purchase a put option.

If the currency pair increases in value, the put option might become worthless but you would profit from your original trade. If the currency trade moved against you and started to fall, then the put option would increase in value. This would offset your losses from the currency pair trade.

 

Benefits Of Hedging With FOREX Options

When you purchase an option to hedge your financial instrument, the maximum that you can lose is the option premium. The option premium is the amount that you had to pay to buy the option. While options can limit your upside or downside risk, you have essentially an unlimited potential for profit.

Hedging price movements with options is also useful for volatile markets where you are concerned that you might get traded out of a position. For example, you might have gone long on a currency trade. You can see that there may be some volatility in the near future, but ultimately you believe that the currency pair will trend upwards.

You don’t want to set a stop-loss because you are concerned, you will be traded out of your position. Options provide an alternative to stop losses while avoiding being traded out of the position.

safety net bridge that represents security when hedging forex

 

Conclusion

Hedging allows you to protect against adverse movements in your trades, while still allowing you to enjoy potentially unlimited profit on your trades. Forex options are one of the most popular ways of hedging for retail traders.

The correct amount that a trade should be hedged will depend on the trader’s risk tolerance and the individual risk of the trade. By evaluating these two factors the trader can determine how much of the trade should be hedged.

 

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