In trading in the financial market, a large role is played by the time range. 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 he will be dear not just every minute, but even second.
The time interval on the trading platforms where the transactions take place has the form of a scale with divisions, which is located vertically on the right side of the chart. Pips are 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 pips in trading?
Among the terminology of "Forex" there is such a thing as a pip, or paragraph. Each newcomer in the study of theory always comes across specialized terms that he needs to know. Otherwise, he simply will not understand what is at stake.
Pips are the smallest unit of measure for price movements 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 earnings or losses of the trader are indicated in points. Very often one can hear from professionals that they have closed a deal with a profit in any 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.
Example of calculating a point value
A point (pip) is always involved in all the calculations required to open and close a position. Four-digit and five-digit quotes may be presented depending on the trading conditions of brokerage companies. The second option is the most accurate, since it provides information on changes in the market price to one ten thousandth, that is, up to 0.0001. For example, you 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 item in the first quotation option will correspond to a tenfold increase in the 2nd option. Thus, it can be understood that 1 point of a four-digit quote will be equal to 10 pips of a five-digit value.
The use of pip in trading in the financial market
In trading in the modern financial market, a trader does not need to independently calculate the value of a point. At first, newcomers often encounter the question of calculating pip values: how much will it be if they are converted into a monetary equivalent, how to calculate the lot price in points, at what distance from an open position to place a protective and profit-fixing order, and more.
In trading, there are two options for calculating the value of pip: for direct and reverse quotes.
An example calculation for the direct quote option is given below:
- The trading asset for Forex USD / CHF has a current value of 1.3000. The main currency in the pair is the American dollar, quoted - franc, which means that the calculations will occur in francs.
- But the trader wants to get the value in dollars, so he needs to perform calculations to change the price of 0.0001. If it rises by one point, then it will earn 1 / 1.3000 = 0.77 dollars. And, on the contrary, if the rate decreases by one point, he will receive a loss for the same amount.
Calculations for the reverse quote:
- The trading asset EUR / USD has a rate of 1.6000, where the euro is the main one and the dollar is the quoted currency.
- If quotes are changed by 1 pip, the trader will either earn or receive a loss of $ 1, depending on the correctness of the chosen direction.
Automated Programs
Pips are not just an ordinary indicator for calculations, but an important element in trading. To facilitate the task for traders in various mathematical calculations, specialists developed special automated programs.
Many technical indicators have in their algorithms not only indicators for determining market changes, such as the strength of a 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 at which the trader’s transactions are completed and the type of quotation (direct or feedback, five-digit or four-digit value).
Most often, traders use special calculators to calculate an item. Using the filter, they set the name of the currency pair, the type of quotation, and as a result get the finished result.
In addition, on many trading platforms, such calculations are performed automatically. For example, on MetaTrader you can select the calculation function in points or the selected currency, and then the trader does not have to perform mathematical operations on his own.
Pipsing technical tools
Based on minimal changes in market quotes, professionals have developed special trading strategies. They are classified as scalping or pipsing. Short-term trades always open on small time frames and are completed in a short time frame.
Usually, a trader opens a large number of transactions in one trading day, 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 make pretty good money. Among the well-known pipsers, one can distinguish the famous expert in the field of trading Larry Williams, who was able to achieve very good results and increase his deposit by 100 times in one year.
To work with short-term traders, traders use a special tool - the pips indicator.
You can also use:
- MA indicator.
- CCI
- ZoneTrade_v2.3.
- "AMA STL Color".
- Bands Fibo Tru and other types of indicators.
Conclusion
In order to profitably trade in the Forex currency market, you need to go through basic training and be able to predict changes in market quotes. Particular attention should be paid to beginners in 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 studying the terminology and the chosen trading strategy, you need to fix your skills on the free version of the demo account. As soon as a beginner gets stable positive results on a demo, you can immediately proceed to trading.