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Understanding How Forex Pips Work

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Forex traders, even though they are not the one actually managing their forex accounts, should have ample knowledge about the workarounds in the forex market and trading in it. Those who are planning to engage in forex trading should make sure that they go through the phase of educating themselves about the different twists and turns in the forex trading world, otherwise, it would be like Alice in Wonderland but in the real world this time.

A big chunk of forex trading basics are dedicated to learning the different forex terms or jargons that are embedded in all the trading activities that a forex trader will be engaging in, whether he or she has been doing trading for a long time now or is just a beginner in the field. Learning what the different terms are for and understanding them at the same time would be a great help in making sure that a forex trader is on the right track.

The most common term used in forex trading is the term "forex pip." Even if you aren't trading yet, by now, you might have heard of this term at one point or another. What is a forex pip? How come it's important in all your forex trading activities?

PIP is actually an acronym, which stands for "Percentage In Point." As a general rule in forex trading, all the profits and all the losses that a forex trader will be incurring in all his or her forex trading activities are measured using forex pips. Because of this simple fact, it is very much a necessity for any forex trader to know what a forex pip is and what its significance is in the forex market.

Generally speaking, a forex pip is the smallest price increment that a currency being traded can make. It allows traders to check the rise and fall in forex currency values in terms of percentage. It is an alternative measure of dollars and cents in trading. It is necessary to measure forex spreads in terms of forex pips because there isn't a universal value that can indicate forex values. So, depending on the currency in question, the value of the forex pip would vary when profits and losses are computed. It is like a universal measure of profits and losses in forex trading.

All major forex currencies except the Japanese Yen are quoted to 4 decimal points. The Japanese Yen is an exception since its value is much lower than the other currencies. To make it more clearer, if you are trading EUR/USD, 1 forex pip is equivalent to 0.0001. If you are trading USD/JPY, then one forex pip is equivalent to 0.01.

Learning about forex pips would, eventually, help you understand all your forex trading activities better. Start with the basics and you will go a long way.


ABOUT THE AUTHOR: BART ICLES
Forex investing http://www.forexstrategysecrets.com/forex-investing starts with a desire to learn and a drive to become a great trader. Learning forex software takes dedication and a good teacher. But once you learn how to trade and do so successfully your life will change and you have options and financial resources you never had before.

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