Forex Basic (4)

What's Pips
Once you have decided to open an account on the FOREX, you'll be given the option laverage how you will take, and how many pips profit target you plan and how many lots would you traded?
What the hell was pips, laverage and lots?
The most common increment of currencies is the Pip. If the EUR / USD moves from 1.2250 to 1.2251, that is ONE PIP. A pip is the last decimal place of a quotation, given that four decimal places are used (as some displays quotations of five or more decimal places, indicating a fraction of a pip). The Pip is how you measure your profit or loss.
As each currency has its own value, it is necessary to calculate the value of a pip for that particular currency. In currencies where the U.S. Dollar is quoted first, the calculation would be as follows.
Let's take USD / JPY rate at 119.80 (notice this currency pair only goes to two decimal places, most of the other currencies have four decimal places)
In the case of USD / JPY, 1 pip would be .01
Therefore,
USD / JPY:
119.80
.01 Divided by exchange rate = pip value
.01 / 119.80 = 0.0000834
This looks like a very long number but later we will discuss lot size.
USD / CHF:
1.5250
.0001 Divided by exchange rate = pip value
.0001 / 1.5250 = 0.0000655
USD / CAD:
1.4890
.0001 Divided by exchange rate = pip value
.0001 / 1.4890 = 0.00006715
In the case where the U.S. Dollar is not quoted first and we want to get the U.S. Dollar value, we have to add one more step.
EUR / USD:
1.2200
.0001 Divided by exchange rate = pip value
so
.0001 / 1.2200 = EUR 0.00008196
but we need to get back to U.S. dollars so we add another calculation which is
EUR x Exchange rate
So
0.00008196 x 1.2200 = 0.00009999
When rounded up it would be 0.0001
GBP / USD:
1.7975
.0001 Divided by exchange rate = pip value
So
.0001 / 1.7975 = GBP 0.0000556

But we need to get back to U.S. dollars so we add another calculation which is

GBP x Exchange rate

So
0.0000556 x 1.7975 = 0.0000998

When rounded up it would be 0.0001

The bottom line is the calculations pips profit from the smallest unit of FOREX transactions