In trading on the financial market, the time range plays an important role. This is especially important when a trader calculates the period for a future transaction. The time factor is also important when choosing trading strategies and techniques, and it is especially important for short-term positions. If a speculator uses scalping in his work, then not just every minute, but even a second will be dear to him.
The time interval on the trading platforms where transactions take place has the form of a scale with divisions, which is located vertically on the right side of the chart. A pip is the most important indicator in time calculations. What is it, what does it matter, how is it calculated? This will be discussed in this article.
What is a pip in trading?
Among the terminology of "Forex" there is such a thing as a pip, or point. Every beginner in the study of theory always encounters specialized terms that he needs to know. Otherwise, he simply will not understand what is at stake.
Pips isthe smallest acceptable unit of measurement of price movement in the financial market. There can be no less than one division point. Each such step of the market movement is fixed on the chart in a vertical scale.
All profits or losses of a trader are indicated in points. Very often, you can hear from professionals that they closed a deal with a profit of a certain number of points. In other words, this means that they correctly calculated the movement of market quotes and were able to capitalize on price changes.
An example of calculating the value of a pip
Pip (pip) is always involved in all calculations required to open and close a position. Depending on the trading conditions of brokerage companies, four-digit and five-digit quotes can be presented. The second option is the most accurate, as it provides information on changes in the market price up to one ten-thousandth, that is, up to 0.0001. For example, we can consider both options for quotes:
- In a four-digit quote, the price change will be 0.0001.
- In five-digit - 0, 00001.
Consequently, a change in one point for the first quotation option will correspond to a tenfold increase in the 2nd option. Thus, it can be understood that 1 pip of a four-digit quote will be equal to 10 pips of a five-digit value.
Application of pip in trading in the financial market
In trading on the modern financial market, a trader does not need to independently calculate the value of a pip. Rookies firstAt times, they often face the question of calculating pip values: how much it will be if they are converted into money equivalent, how to calculate the cost of a lot in points, at what distance from an open position to place a protective and profit-taking order, and more.
In trading, there are two options for calculating the cost of a pip: for direct and reverse quotes.
A calculation example for the direct quote option is shown below:
- USD/CHF forex trading asset has a current value of 1.3000. The main currency in the pair is the US dollar, the quote is the franc, which means that calculations will be made in francs.
- But the trader wants to get the value in dollars, so he needs to perform the calculations for a price change of 0.0001. If it rises by one pip, he will earn 1/1.3000=0.77 dollars. And vice versa, if the exchange rate drops by one point, he will receive a loss by the same amount.
Calculations for reverse quote:
- The EUR/USD trading asset has a rate of 1.6000, where the euro is the main and the dollar is the quoted currency.
- If the quotes change by 1 pip, the trader will either earn or receive a loss of 1 dollar, depending on the correctness of the chosen direction.
Automated programs
A pip is not just an ordinary indicator for calculations, but an important element in trading. To make it easier for traders to perform various mathematical calculations, specialists have developed special automated programs.
Many technical indicators havetheir algorithms are not only indicators for determining market changes, such as the strength of the trend, its direction, market volatility and much more, but also mathematical calculations for certain currency pairs.
All such calculations take into account the time interval on which the trader's transactions are made, and the type of quote (direct or feedback, five-digit or four-digit value).
Most often, traders use special calculators to calculate a pip. Using the filter, they set the name of the currency pair, the type of quote, and as a result, they get the finished result.
Besides, on many trading platforms such calculations are made automatically. For example, on MetaTrader, you can choose the calculation function in points or the selected currency, and then the trader will not have to perform mathematical operations on his own.
Technical tools for pipsing
Based on minimal changes in market quotes, professionals have developed special trading strategies. They belong to the category of scalping or pipsing. Short-term trades are always opened on small time frames and are made in a short time frame.
Usually, in one trading day, a trader opens a large number of transactions, each of which has a small number of points earned. Trading strategies of the scalping technique due to the large number of completed transactions allow traders to earn quite well. Among the well-known pipsers, one can single out the famous expert in the field of trading Larry Williams, who was able toachieve very good results and increase your deposit by 100 times in one year.
To work with short-term transactions, traders use a special tool - the pips indicator.
And you can also use:
- MA indicator.
- CCI.
- ZoneTrade_v2.3.
- "AMA STL Color".
- "Fibo True Bands" and other types of indicators.
Conclusion
To profitably trade on the Forex currency market, you need to go through basic training and be able to predict changes in market quotes. Beginners should pay special attention to the laws of the financial market and money management, where a point or pip is the main unit of calculation for all speculative operations.
After learning the terminology and the chosen trading strategy, you need to consolidate your skills on the free version of the demo account. As soon as a beginner gets stable positive results on the demo, you can immediately move on to trading.
