There was a time when Forex Trading was an alien word for most people around the world. Today currency markets have become a very popular and common mode of investment for millions of people. More than a trillion dollars are traded every day in these markets making them bigger than the stock markets of the world. Forex markets are open 24 hours a day because of the division of the regions of the world into different time zones. Also, one can invest in currency market sitting in the comfort of his own home using the internet. These markets work through trading of currencies in pairs such as Euro/USD, Yen/Pound, DM/Franc, and so on. Investors around the world are buying and selling these currency pairs to make a profit. But how is profit or loss calculated n the Forex markets?
Pip Is the Smallest Unit of Exchange in Forex Markets
To understand the profit and loss in Forex markets, one has to master the concept of pip. Pip is the smallest unit of exchange. In the cases of most currency pairs, the value of one currency is expressed up to four decimal points. In these cases, the value of pip is 0.0001. In cases of currencies that are expressed up to two decimals, the value of pip is 0.01 only. The most basic formula to calculate profit in a trade in Forex is as follows.
Profit= Change in price in pips X number of units traded
For example, if you are buying USD and the leverage is 100:1 (and you have $1000 in your account), you can buy USD at a certain price and predict that it will rise. If it indeed rises against the other currency, your profit is calculated as follows.
Number of pips (price change) X 100000
This means that you can earn a handsome amount with a small money in your account with the slightest movement of a currency that may not even be noticeable to an ordinary person. But as an investor in the Forex market and knowing the concept of pips, you can easily bet on the rising and falling prices of currencies and make money accordingly.