Have you tried to understand what pips are all about and how they work, especially on a trading platform such as MT4? Well, look no further…in this article, I will be explaining all you need to know about pips are and how you can read them on MT4.
• Lot sizes are key factors to consider when reading pips on MT4.
• The bigger your lot size, the bigger the value of your pip.
• A pip is a price interest point that represents the slightest change in currency pair movements.
• Getting the value of pips in trades where USD is the base currency is quite different from the value of pip generated when USD is the counter currency.
SEE ALSO: 5 Best Scalping Forex Robots for MT4
In today’s world, knowing how to utilize pips is essential if you want to succeed as a forex trader, alongside understanding the technical and fundamental analysis of forex trading.
What is a Pip?
The word “pip” stands for percentage in point or price interest point, and it measures changes in the value of currency pairs in the forex market. These pips help to determine the profit or loss of a trader concerning their position in the forex market.
Trading pips are usually at the last decimal place. For instance, if a EUR/USD pair is 1.45321 and if this increases in value to 1.45323, the EUR/USD pair is said to have increased by two pips (a 0.00002 increase in value).
One thing to take note of is the fact that trading in a particular currency that is not the accounting currency in forex will naturally attract higher exchange rates.
For instance, a EUR/GBP pair will naturally attract more value than, say, a USD/NGN pair because Pound Sterling (GBP) is naturally higher in value than the United States Dollar.
Also, trading in EUR/GBP will automatically lead to higher margins, especially when compared to trading in USD/NGN.
Now that you have understood what pip means, it is important that you equally understand how to easily read pips in multiple currencies and how traders make their decisions based on this.
How to Read Pips in Various Currency Pairs
USD as the Counter Currency
For example, having the U.S. Dollar as the counter currency for EUR/USD, GBP/USD, etc., means that they would all have the same pip values and any movement in these pairs, such as from 1.1000 to 1.1001, generally means that the pip increased by one.
This increase in pip by one means different things for different lot sizes. For a lot size of 1000 euros, for example, 1 pip will represent $0.10; for a lot size of 10,000 euros, 1 pip will represent $1; and for a full lot size of 100,000 euros, 1 pip will represent $10.
This is a consistent format and would be the same as well for the GBP/USD currency pair.
Now, to determine the value of this pip in either EUR or USD, we simply make use of a formula which is given as pip size/spot rate × lot size. For instance, given that we have the spot rate at 1.34.
In our example, we have 0.0001/1.34 × 100,000 euros. This will give us approximately 7.463 euros.
This means the value of 1 pip is equal to 7.463 euros given our spot rate, and to convert this to USD to determine the value as well, we simply multiply 7.463 euros by the current EUR/USD exchange rate, which is 7.463 euros × 1.14, which is equal to $8.508.
So there you have it. The value of 1 pip, given a 100,000 lot size and a spot rate of 1.34, is 7 euros and $9, respectively.
USD as the Base Currency
In this case, different currency pairs have different pip values, and if you want to read the pip value using USD as the base currency, you will have to divide the position size by the exchange rate.
This means that, for instance, if a currency pair of USD/AUD is trading at 1.6000 and you still decide to use a full lot size of $100,000, the pip value will be 0.0001 $100,000, which is 10AUD since the Australian dollar is the counter currency.
To get the value of the same pip in USD, you will have to do the opposite of what was done in the case of USD being the counter currency, which is to divide the value of AUD for 1 pip by the current exchange rate of USD/AUD.
Reading Pips for Cross-Currency Pairs
Reading a pip to determine its value for cross-currency pairs occurs when none of the currencies are in the currency denominated account.
For instance, trying to determine the value of a pip concerning the currency pair of EUR/GBP in a dollar-denominated account means you are reading pips for cross currency pairs.
What you do here is simply multiply the standard 10 pip value using the full lot size by the counter currency/account exchange rate.
This simply means multiplying 10 by EUR/USD, and given that the EUR/USD rate is 1.1000, that would be 10 × 1.1000, which is equal to $11 for a currency pair of EUR/GBP at a full lot size of 100,000 euros.
Note: If you are making use of a dollar-denominated account and you engage in trading a currency pair where USD is the counter currency, as a rule of thumb, pip values will generally take on the values of 0.10, 1, and 10 respectively, depending on the level of your lot size.
This same rule goes for any other currency that is acting as a currency for the denominated account and serving at the same time as a counter currency.
Frequently Asked Questions (FAQs)
What are Pips in MT4?
Pips in MT4 signify percentage in point and that means a very slight percentage change by a currency in the forex market. It is also used to determine currency measurements during trading.
What is the Best Lot Size for $100?
For a $100 opening balance, the best lot size would be 0.01.
Knowing how to read pips on MT4 is an important step if you want to become a successful forex trader.
To understand more about pips and how they work concerning different currency pairs, you can go through this article as it has provided the foundation you need to understand the basics.
Hope this helps?
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