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Thread: What is pips? How does it work on MT4?

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    Post What is Pips? How does it work on MT4?

    What is Pips? How does it work on MT4?


    What is Pips? How does it work on MT4?

    Greetings, forum members! I hope you're all having a good time right now. On MT4, we'll hear more about pip or pips. Are you all set? Let's get started.


    What is pip, exactly?

    A pip is a tiny unit of measurement in the forex market that represents a difference in a currency pair. It is short for "percentage in point" or "price interest point." It can be expressed as a percentage of either the quoted currency or the underlying currency.

    The smallest quantity in a currency quote is represented by a pip, which is a standardized unit. It is usually $0.0001, or 1/100th of a percent, or one basis point, for currency pairs linked to the US dollar. Investors are protected from catastrophic losses due to the uniform size. If a pip is worth ten basis points, a one-pip change in currency prices causes more uncertainty.



    Pips: Getting to Know Them

    Assume that we have a 0.7747 USD/EUR direct quote. This means that one US dollar is worth approximately 0.7747 euros. If this quote increased by one pip (to 0.7748), the value of the US dollar will rise relative to the euro, as US$1 would allow you to buy slightly more euros.

    TAKEAWAYS

    Most currency pairs are quoted in the fourth decimal position. A pip represents the fourth (and thus smallest) of those four numbers.
    Despite the fact that a pip is a very small unit of measurement, forex traders are usually highly leveraged, meaning that a one pip difference will result in a large profit or loss.
    Pips are the most basic unit of measurement in forex trading.


    What It Means to You and How It Affects You

    A one-pip change to the dollar amount, or pip value, is made based on the number of euros purchased. The net cost of purchasing 10,000 euros in US dollars is US$12,908.22 ([1/0.7747] x 10,000). If the exchange rate for this pair increased by one pip, the price paid will be $12,906.56 ([1/0.7748] x 10,000). In that case, a 10,000 euro lot's pip worth would be US$1.66 ($12,908.22 - $12,906.56).



    The Importance of Pips in Forex Trading

    If trading in the foreign exchange (forex) market, it's tough to underestimate the importance of pips. A pip, which stands for "percentage in point" or "price interest point," represents the most simple movement a currency pair can make in the market. Like in many currency pairs, including the British pound/US dollar (GBP/USD), a pip is equivalent to 1/100 of a percentage point, or one basis point, and pips are counted in the 4th position after the decimal in price quotes. In currency pairs such as the Japanese yen, a pip is one percentage point, and pips are counted after the decimal in price quotes.

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    Currency exchange is needed to facilitate international trade and industry. On the forex market, such transactions, as well as bets made by speculators seeking to benefit from price fluctuations in currency pairs, take place. Pips are used to measure the rates that participants in the forex market pay when they exchange currencies.


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    Functions and Pips

    A pip is a unit of measurement in foreign exchange (forex). Exchange quotes in forex pairs are distributed using bid and ask quotes that are accurate to four decimal places. To put it another way, forex traders buy and sell a currency whose value is expressed in terms of another currency.

    Pips are a unit of exchange rate movement calculation. Since most currency pairs are quoted to a four-decimal point limit, the smallest adjustment for most currency pairs is one pip. A pip's value is calculated by multiplying the exchange rate by 1/10,000, or 0.0001.

    A trader who wants to buy the USD/CAD pair, for example, would buy US Dollars while simultaneously selling Canadian Dollars. When a trader wants to sell US dollars, he or she sells the USD/CAD pair while simultaneously buying Canadian dollars. The difference between the bid and ask prices of a currency pair, as well as the amount of benefit or loss that can be realized from a contract, is referred to as "pips" by traders.

    Japanese Yen (JPY) pairs are quoted with two decimal points, which is a significant exception.


    Pips and Profitability

    At the end of the day, whether a trader made a profit or a loss on his or her positions is determined by the behavior of a currency pair. A trader who buys the EUR/USD would profit if the Euro increases in value against the US Dollar. If the dealer bought the Euro for 1.1835 and sold it for 1.1901, he or she would have profited by 1.1901 - 1.1835 = 66 pips.

    Consider a trader who buys the Japanese Yen and sells the USD/JPY at 112.06. If the exchange is closed at 112.09, the trader loses three pips, but gains five pips if the position is closed at 112.01.Despite the fact that the difference can seem negligible in the multitrillion-dollar foreign exchange market, gains and losses add up quickly. A trader would profit $10 million x (112.06 - 112.01) equal ¥500,000 if a $10 million position in this setup was closed at 112.01. This benefit is calculated as ¥500,000/112.01 = $4,463.89 in US dollars.


    Pip's Action in the Real World

    A combination of hyperinflation and devaluation may make exchange rates unmanageable. In addition to impacting users who are required to hold large amounts of cash, this can make trading difficult to handle and the concept of a pip loses appeal.

    The most famous historical example of this happened in November 1923 in Germany's Weimar Republic, when the exchange rate dropped from 4.2 marks per dollar before World War I to 4.2 trillion marks per dollar. Another example is the Turkish lira, which reached a peak of 1.6 million per dollar in 2001, exceeding the capacity of several trading networks.

    By removing six zeros from the exchange rate, the government renamed the currency the new Turkish lira. The average exchange rate in January 2021 was 7.3 lira per dollar, which is more rational.



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    Pipettes, spreads, and pips

    When you're selling, the value of the pips for your trade can vary depending on your lot size. (In terms of money, a standard lot is 100,000 units, a mini lot is 10,000 units, and a micro lot is 1,000 units.)The spread is the difference in pips between the bid price (which is what the seller receives) and the ask price (which is what the buyer receives) (which is what the buyer pays).

    The spread is basically how the broker makes money because most forex brokers do not charge commissions on individual trades. The spread is owned by the broker when you purchase at the ask price (say, 0.9714) and sell at the bid price (say, 0.9711). (3 pips). Several forex brokers quote rates to one decimal place after a pip. Pipettes are the divisions of pips that allow for greater pricing and spread versatility.


    US Dollars, the value of a pip

    The currency you used to open your forex trading account determines the pip value of other currency pairs. The pip value for currency pairs where the US dollar is the second, or quotation, currency is $10 for a standard lot, $1 for a mini lot, and $0.10 for a micro lot if you open an account in US dollars. Only if the US dollar's value increased or decreased significantlyby more than 10%would those pip values change.

    If your account is funded in US dollars, but the dollar isn't the quote currency, the usual pip value is divided by the dollar-to-quote-currency exchange rate. If the US dollar/Canadian dollar (USD/CAD) exchange rate is 1.33119, the pip value for a daily lot is $7.51 ($10 / 1.3319).


    Pip Values of Account Currencies

    When the account is financed in a currency other than the US dollar, the same pip value sums apply when that currency is used as the quote currency. The pip value for a euro-denominated account will be 10 euros for a standard lot, 1 euro for a mini lot, and 0.10 euro for a micro lot when the euro is the secondary currency in the pair. For pairs where the euro is not the quote currency, you must divide the usual pip value by the exchange rate between the euro and the quote currency.



    Trading Pip Values

    Assume you're selling the euro against the British pound (EUR/GBP), with bid and ask rates of 0.8881 and 0.8884, respectively. Since you expect the euro's value to rise against the pound, you buy a daily lot of euros at the ask price of 0.8884. I n the trading day, the bid price is 0.8892 and the ask price is 0.8894. You offer at the bid price of 0.8892. You accrued an 8-pip profit. If your account was funded with pounds, you made 80 pounds on the exchange.



    How can you calculate the number of pips on MT4?

    The number of pips between 2 points on the MT4 platform's price chart is calculated as follows:

    Method #1: Draw a horizontal line at the first level and another at the second level, then subtract the lower line value from the higher line value to calculate the distance between them.
    The difference between 1.25661 and 1.10896 levels on the EUR/USD table, for example, is 1476.5 pips:0.14765 = 1.25661 1.10896
    When the price of a currency pair on your platform has five decimals (for example, 1.25661), multiply 0.14765 by 10000:
    1476.5 pips = 0.14765 x 10000

    Multiply the result of the deduction by 10,000 if the price has four decimals. This process, which is a little more complicated and time-consuming, can be used on both MT4 and platforms that do not have pip calculation tools.

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    Method #2: MT4 has an easy and quick-to-use tool. To use this tool, press the mouse wheel to activate the crosshair cursor. Maybe it's the first time you've done anything like that. We're used to using the mouse wheel to scroll up and down web pages. When we scroll the mouse wheel forward, the page scrolls up, and when we scroll the mouse wheel back, the page scrolls down. The mouse wheel, on the other hand, has a different function:

    When hovering over the MT4 price line, "press" the mouse wheel. After you hear a click, the mouse crosshair cursor should appear on the chart:





    If your mouse doesn't have this capability, don't worry. Another way to activate the mouse crosshair cursor on the price chart is to: There is a Crosshair tool on the Line Studies toolbar at the top. To bring up the mouse crosshair cursor, simply click on it:




    Move the crosshair cursor to one of the price chart points, click and hold the mouse left button, and drag the cursor to the other point while maintaining the mouse left button. To the right of the cursor, three numbers will appear. Between the start and end points of the crosshair movement you just finished, the first number is the number of candlesticks or bars. The point distance between two price levels is the second number (you have to divide it by 10 to have it in pips if currency pairs prices have 5 decimals on your platform). The cost of the level where the crosshair cursor is placed is indicated by the third number.

    MT4 allows measuring the number of pips between two price chart points a breeze, unlike other trading platforms. It's crucial to set the stop loss and target guidance when trading. You might want to know how many pips are between your entry level and your stop loss level, for example.

    Thank you so much for reading this post. I hope you have learned something useful about pips, until next time.
    Last edited by reyann1115; 14-05-2021 at 12:17 PM.


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