Forex Trading – Forex is among the most popular financial investments globally. With its millions of traders every day, the Forex Market trades over 6.6 Trillion dollars in total daily forex transactions, making it one the largest and most liquid financial markets globally. For many people, forex has been their go-to investment plan when pursuing financial stability for several reasons. Forex has proven itself to be a good and less risky investment approach than any other type of investment; second, understanding forex and how it works put you into a position of ease and comfort since it’s easy to understand how Forex (FX) works in paper, and lastly, its ability to give the trader the luxury of earning 5x or even 10x the amount of money the trader is earning from their job.
Picture this, you’re new in Forex trading, and you want to experience the life of a forex trader. You’d ask a friend that has an experience in Forex Trading themselves or have an idea how it works; or, you’d read forex related topics like this one, and throughout your journey of studying how forex work, you stumble upon the term “Pips or points” and “Base and quoted currency.” Now, you may ask, what are these? Well, you’ll know because, in this article, we will discuss what forex pips are. Let’s start by discussing what makes pips.
Base/Quoted Currency-Forex Trading
In Forex, you’ll use these two terms when trading, and they stand for XXX/YYY; X being the base currency while Y is the quoted currency. Base currency is the currency you have in your trading account, most probably USD, EUR, JPY, etc. Quoted currency is the currency you want to trade with base currency. For example, if you have USD in your trading account and want to trade it for EURO, EURO will be your base currency, while USD will be your quoted currency.
You want to trade your 500 USD to JPY; your base currency is your 500 USD and quoted currency (many call it secondary currency) JPY. You trade your pair by their exchange rate. What is the exchange rate? The exchange rate is the rate of one currency (value) to another currency. In this scenario, the exchange rate of USD/JPY as of August 13, 2021, is 110.29. Meaning per 1 USD, that is 110.40 Yen in JPY. If you trade your 500 USD, then you’ll receive 55,144.75 Yen. Let’s say you want to buy USD this time, then it’s the same process, but this time, you need 55,144 Yen for 500 USD.
In Forex, how this works is you speculate the price or value of currency whether it falls or rises. If you feel like JPY is going to increase in value by a few pips, then, of course, you’d want to buy it as long as it hasn’t increased yet, then you sell. Now, you noticed I mentioned “increase in value by a few pips.” What is a pip?
A pip is the smallest measurement of change between two currencies. It is 1/100 of 1% or one basis point of the currency pair. This would mean the smallest move in a currency pair is 0.0001. Let’s take the example from above. The exchange rate between USD/JPY is 110.29 per dollar. To calculate the one pip you’d for example USD/JPY is 110.29 ÷ 100 = 1.1029 > 1.1029 ÷ 110.29 = 0.01 pip. Now, let’s assume the Japanese Yen increased in price like 110.30, then it increased by one pip (110.30 ÷ 100 = 1.103 > 1.103 = 110.30 *increased by one pip.) You would often hear terms like “USD/EURO increased by ten pips.” Or “USD/JPY decreased by ten pips.” At this point, it means if it increased, then the exchange rate between USD – EURO has increased, but if it decreased, the value of USD – EURO is lower than before.
Forex trading can be very confusing at first but don’t let that discourage you, always pursue learning more and getting better at forex trading because at the end of the day. All the efforts will be worth it.