Posted by forex at 9:16 AM
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1. Learn how currencies are quoted. According to Stocktrading Software, most currency prices are quoted in four decimal places, for example 1.1234. However, some currencies, such as the Japanese yen, are placed with only two decimal places, for example 1.23.
2. Convert the PIP to the correct decimal place. For currencies that quote prices with four decimal places, a PIP refers to 0.0001 unit of that currency, because it measures one point of change in that currency. If a currency is quoted to two decimal places, a PIP is equal to 0.01 unit of that currency.
3. Look at a retail example to understand the concept. If a retailer changes a price by one penny, which is the lowest amount the price can change, there is a change of one PIP.
4. Look at an example of an exchange. A common currency exchange is the U.S. dollar and the Euro. If a currency is quoted as EUR/USD = 1.4112, it means that at that time, it costs $1.4112 to buy one Euro. If the price changed to 1.4113, it changed by one PIP because the fourth number after the decimal changed by one number. If the price changed to 1.4105, it changed by seven pips because it is based on the change in the fourth number after the decimal.
5. Understand how to make money with PIPs. When you sell a currency at a higher price than what you purchased it for, you make money. For example, if you made a trade from the above example and purchased the Euro for 1.4112 and then sold it for 1.4130, you would have made 18 PIPs.
6. Purchase currencies using leverage. Most people purchasing currencies use a FOREX broker. The broker allows you to purchase a standard lot of $100,000, for example, for only $1,000. This allows the small changes in the price of currency to add up to large profits.