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Making money with forex trading all comes down to pips… Here's what you need to know…

by , 04 November 2015

If you fancy giving forex trading a go, you need to understand how pips work. Pips determine how much you make from trading currencies.

So what exactly are pips? And what difference do they make to your profits?

Read on to find out more…


What are pips?

 
Pips are the smallest increment that measure changes in exchange rates on the forex market.
 
Broadly speaking, all currencies are quoted to four decimal places. For example, say the US dollar against the rand is trading at 13.9787, a pip refers to the fourth decimal place.
 
There is an exception to this. The Japanese yen is only quoted to two decimal places. So in the case of the Japanese yen, a pip refers to the second decimal place.
 
Going back to our US dollar/rand example. If the currency pair strengthens by 4 pips, it will move to 13.9791. In other words, the base currency (the US dollar) strengthens.
 
On the other hand, if the currency pair weakens by 4 pips, it will move to 13.9783. In other words, the base currency (the US dollar) weakens.
 

How pips make you money 

 
When you put a forex trade on, you speculate on whether one currency will strengthen or weaken against another currency in the pair you trade.
 
To make money from your forex trades, you need to make pips depending on whether you’re long or short.
 
But before you can be in a position to make any money, you first need to cross the spread.
 
The spread is the difference between the current value of a currency pair and the price you pay for it. This is through the bid price and the offer price. You sell at the bid price and buy at the offer price.
 
The spread is where the forex brokers make their money. You need to cross the spread to breakeven and then hope the trade performs as you want it to.
 
So there you have it. What you need to know about making money with forex trading and pips.
 
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Making money with forex trading all comes down to pips… Here's what you need to know…
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