How Money is Made Trading Forex: Pips Mean Profit

 
 
 
Take this scenario. John is a trader. He’s reading the news and predicts that in two months the American Dollar will go down in value compared to the Japanese Yen. So John wants to sell his Dollars and buy Yen. He borrows Dollars from his broker to do this trade. Two months later it turns out he was right. The profit he made from the increased value of the Yen would be the money made in the trade. He’d pay his broker for the loan of the now lower value Dollars, and what’s left is John’s earnings.

 

John did well there!

 

Normally when you are selling something, you need the value to go up in order to make money, but in Forex it is possible to make money whether it goes up or down.

 

The difference in value is measured in pips. The more pips the more profit. A pip, is the smallest price change that a given exchange rate can make. And your profits and losses are calculated in how many pips you gained or lost.

 

In an exchange rate the value of one currency is pitted against the other, excuse the pun. The exchange rate on a currency pair is the value of one currency in regards to the other. The first currency is the base rate and the second is the quote rate. The second currency in the pair is a quote of how much of the base currency it is worth.

 

If you had pounds and the exchange rate of USD/GBP was 1.4467, and a few days later you wanted to sell (‘go short on’) your pounds when it was at 1.4477 then you’ll have made 10 pips.

 

It’s not necessarily easy, but in some ways it’s as simple as any other sale.