What Are Forex Pips?

Currencies are traded on a price and point or pip system. Each currency pair has its own pip value. When seeing a Forex price quote, you see something listed like this:

Euro/USD 1.2210/13

Explanation:

If you want to purchase Euro/USD meaning, you buy $100,000 Euros and sell US$ 122,130. In other words you receive US$122,130 for 100,000 EUROS.

The difference between the bid and the ask price is referred to as the spread. In the example above, the spread is 3 or 3 pips.

Since the US dollar is the centerpiece of the Forex market, it is normally considered the base currency for quotes. In the Majors, this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair.

For example a quote of USD/CHF 1.3000 means that fore one U.S. dollar you receive 1.30 Swiss Francs. In other words, you receive 1.30 Swiss Franc for each 1 US$.

When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/CHF quote above increases to 1.3050, the dollar becomes stronger because it will now buy more Swiss Franc than before.

The three exceptions to this rule are the British pound (GBP), the Australian and Euro dollars. In these cases, you might see a quote such as EUR/USD 1.2080, meaning that for EURO you receive 1.2080 U.S. Dollars.

In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar since it now takes more U.S. dollars than other currencies.

In other words, if a currency quote rises, the value of the base currency increases. A lower quote means the base currency is weakening.

Currency pairs that do not involve the U.S. dollar are called cross currencies but the calculation is the same. For example, a quote of EUR/JPY 134.50 signifies that one Euro is equal to 134.50 Japanese yen.

Keep in mind these 2 very important rules:

Rule 1 - Cut Your Losing Trades And Let Your Winning Trades Run

You will have losing trades. Every Forex trader has. The secret is that a consistent and disciplined trader ends up with more winning trades at the end of the day.

When you are in a losing trade, my advice to you is stop trading. Most new traders are lowering their stop loss just to prove they are right or hoping that the market will reverse. Unfortunately, they ended up with more losses.

Remember, smart traders know there are many other opportunities. Cut your losses short and compound those winning positions.

Rule 2 – Never Ever trade Forex Without Placing A Stop Loss Order.

Place a stop order along with your entry order via your online trading station to prevent potential losses.

Before initiating any trade, you have to calculate at what point you would be wrong because the market always changes direction and you definitely need to minimize your losses.

To make profits, a trader can either enter the market with a buy position known as going long or a sell position known as going short.

Assume you have been studying the Euro currency which is usually paired first with USD.

Your trading methods, rules and strategies will tell you that the it will rice in the next 2 weeks, So you buy the Euro/USD pair.

You open up your trading station software which will be provided to you for free by Forex companies and you see that the Euro/USD pair is trading at:

Euro/USD: 1.2010/1.2013

Because you believe that the market price for the Euro/USD pair will rise, you will enter a buy position on the market.

For instance, you bought one lot of Euro/USD at 1.2013. As long as you sell back the pair at a higher price, you will be making money.