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A Beginner?s Guide To Forex Pips
Author: Jeff Cochran
Apart from formulating strategic analyses, you also need to understand the concept of pips if currency trading is to be a lucrative endeavor for you. A pip is the basic unit used in measuring currency movement. In other words, it is the smallest possible movement in the price of a currency pair. Pips are generally understood as a percentage in point and they serve as the basis upon which your profit or losses per trade will be measured. As a trader, it is very important for you to have more positive pips than negative ones at the end of a trade because it is the only way that you get more profit.
Forex pips are typically derived from the variations in the fourth decimal point of major traded currencies. But some currencies, like the Japanese Yen, use the second decimal point as the basis for their pips. Also, there are different pip values for each currency pair being traded. The discrepancies in value come as a result of the movement in currency prices which can happen in each regional currency market. What this means is that there are some currency pairs that will give you higher dollar value for each pip, while there are others that provide insignificant dollar amounts per pip. A popular currency pair that offers a full dollar for each pip is the EUR/USD or Euro-US Dollar.
Still, it would be ill-advised for beginners to make use of the dollar value of the currency trade as the yardstick for their success or failure. Even if pips do not have a constant monetary value, they provide true representation of the trader’s skills in formulating strategies. As a beginner, gaining a positive pip on a $100 currency trading account has the same significance as one pip gained in a $10,000 account.
Always remember that the most basic goal in currency trading is getting as many positive pips as possible. If you see that you have more negative pips at the end of the trading day, you might need to rethink your strategies. Negative pips can only mean losses. Once you have gained considerable experience in pips, you can start manipulating the factors that can directly influence the value of each pip you gain. You can look at the regional market in which a currency is being traded, the amount of bids being made on a particular currency and the currency pairing itself to help you determine which trade will give more value for each positive pip you gain.
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