Pips and spreads are what spell profitability and loss in the foreign exchange market. These might appear in a pip calculator in terms of insignificant amounts as $0.0001, but the impact of these figures can be huge depending on the currency values and the lot size of the currency pair being traded. Pips are defined as the smallest unit by which price movements can go either upward or downward. Spreads, on the other hand, are defined as the difference between the selling price and the buying price. Spreads are often measured in pips. Every trader in the foreign exchange market needs to know these two figures in every currency pair he holds and is planning to trade.
Forex traders need not bring out their pencils and hand calculators to find out what these figures are since they can always turn to a reliable pip calculator online. For some currency pairs, the pips are fixed and the only figures to be calculated are the pip values and spreads. This is true for USD currency pairs like EUR/USD, GBP/USD, and AUD/USD all trading at $10 a pip for standard lots. The USD/JPY currency pair has a higher pip value at $100 apiece also for standard lots. A pip calculator can be used to determine the pip value of a particular currency pair. Some calculators also return the dollar value of the spread based on the pip value computed for a specific currency pair.
Pips and spreads are the lifeline of forex trading. Not paying attention to these values can wipe a trader off the market just as easily as haphazardly buying and selling currency pairs. As miniscule as the pips might be, they actually have a huge effect on trading currency pairs, especially with the riskier high leverage accounts. Higher pip values on highly leveraged accounts can lose out big-time when there is not enough capital in the trading account.
Computing for pip values using a pip calculator actually accounts for just half of the equation. The other part of the equation has to do with leverage and margins – the upside and the downside of a trade will have to be carefully weighed before carrying out a trade. Needless to say, every forex trader will have to understand and manage his risks by taking into consideration these figures churned out by various online forex tools.
While losing out on a trade is a reality that every forex trader will have to face, minimizing the impact of these losses on any trading account should be the goal of every forex trader. Pips and spreads from an online pip calculator can give forex traders an idea of how a particular trade can affect his account. Whether or not he puts in the trade or holds off until more profitable conditions present themselves is a decision that the forex trader will have to make based on his own trading strategy and trading goals. The profitability of any forex trading account does not rest on any single forex tool around but rather on the trader’s ability to make sound trading decisions given information from all these tools.