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When it comes to making a profit in forex trading, it all comes down to the pips…

by , 03 September 2014

Forex trading is all about the movement of one currency against another currency.

This comes down to the tiny movements in the values of currencies. These are pips.

So what is a pip? How do they work? And what's the minimum movement in pips you need to make a profit?

Let's take a closer look…

What are pips?

Pips are the measurement of the smallest value that an exchange rate can move in the foreign exchange market.

When it comes to the majority of currencies, they’re quoted to the fourth decimal point. For example, if the GBP/ZAR bid is quoted at 17.7000 and it moves up two pips, it will then be quoted at 17.7002.

With a move up in pips, the base currency (the first currency in the quote) is becoming stronger and the quote currency (the second currency in the quote) is becoming weaker.

One exception to the fourth decimal point rule is the yen. It’s quoted to the second decimal, for example, 135.22.

The effect of the spread on your forex trading

As with all forms of trading, you have to pay a fee to trade. With forex trading, you pay this through the spread.

Currency pairs come with a bid and an offer price. The bid price is what you sell at. The offer price is what you buy at.

The difference between the bid and offer price is the spread. And that’s where forex brokers make their money.

What this means is as soon as you put a trade on, you need your trade to cross the spread to be in the money. For example, if the spread is equal to two pips, you need your forex contract to rise by two pips before you breakeven.

If you stick to trading the major currency pairs, the spread is less than if you trade more exotic currency pairs.

So there you have it, why it all comes down to the pips when it comes to making a profit in forex trading.

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When it comes to making a profit in forex trading, it all comes down to the pips…
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