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Understanding the Fundamentals of a Forex Pip

In foreign exchange (forex) trading, understanding the basic terminology is pivotal to effectively navigating the complex nuances of the forex market dynamics. One essential term that every forex trader comes across is a ‘forex pip.’ This article delves into what a forex pip is, its importance, calculation, and implications in the forex market.

What is a Forex Pip?

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Forex Pip, an acronym for “percentage in point,” represents the smallest increment by which the price of a currency pair can change. Translated into a numerical perspective, a forex pip is generally equivalent to a one-digit move in the fourth decimal place of a currency pair, or 0.0001. Consequently, if the exchange rate of a currency pair like EUR/USD moves from 1.1850 to 1.1851, it would be said to have moved by one pip.

However, for currency pairs involving the Japanese yen (JPY), the pip’s value is considered at the second decimal place because the yen denotes much closer to a whole number. Therefore, a one-pip movement for USD/JPY might be from 109.90 to 109.91.

The Concept of Pipettes

In recent years, the concept of pipettes or fractional pips, equivalent to one-tenth of a pip, has introduced more granularity. This implies that most brokers now quote currency pairs to five decimal places and yen pairs to three decimal places, effectively allowing for more precise price movements to be captured.

Importance of a Forex Pip

A pip is principally important because it forms the basis for calculating profit or loss in forex trading. Each pip movement influences the profit amount. Thus, if a trader bought a currency pair and the price moved up by 10 pips, they would make a profit proportional to the invested amount. Equally, a trader would record a loss if the price falls by a set number of pips.

Calculating Value of a Forex Pip

The pip value calculation depends on the forex pair, the trade size, and the exchange rate. Typically, the value of a pip is calculated by multiplying one pip (0.0001) with the specific lot size. For standard lots of 100,000, the pip value can be calculated as (0.0001 * 100,000), which equals $10 for pairs that involve USD. In mini lots (10,000), the pip value turns out to be $1.

Understanding Pips in Forex Trading Strategy

Forex traders use pips to measure price movements, set targets, and define stop-loss levels. By understanding pip values, traders can manage their risk and reward profile effectively, which is an integral part of a successful forex trading strategy.

For instance, if a trader is willing to risk 50 pips on EUR/USD to make a potential gain of 100 pips, this creates a risk-reward ratio of 1:2. The trader won’t enter the market until he finds a trade with such favourable conditions.


A forex pip, in its simplest sense, is a fundamental unit of measure in forex trading. It plays a significant role in depicting price changes, calculating profits and losses, and shaping trading strategies. As a forex trader, mastering the concept of pips and how to calculate their value is crucial for making informed trading decisions. Thus, successful forex trading is not just about predicting the direction of market movement correctly but also about understanding the underlying mechanics, such as the concept of a forex pip.

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How to find a broker that offer a demo account

Finding the right brokerage with demo accounts for new entrants or beginner investors is critical for their initial trading journey. It allows one to test the trading platform, develop skills, and execute strategies without risking real money. This comprehensive article outlines the process of finding a perfect broker offering a free demo account.

Understanding Demo Accounts

First, it’s necessary to understand what a demo account is and how it functions. A demo account is essentially a simulation of the live market environment brokerage firms offer. It uses virtual money to simulate real trading experiences, thus allowing a user to develop a clear understanding of the platform without risking actual capital.

Features You Should Look For

While locating a broker with a demo account, ensure the account has certain features that align with your learning needs. These include:

  • Real-Time Market Conditions: Go for a broker’s demo account that mimics the actual market conditions to give you an accurate feeling of live trading. This will help you get a firm grasp on the market’s workings.
  • Virtual Cash Balance:** Adequate virtual balance is essential for gaining extensive experience over different strategies and trades.
  • Fully Functioning Platform: A demo account should have all the tools, charts, and indicators available in a real trading account to provide the right learning platform.
  • Customer Support: Make sure the broker’s customer service is available to demo account holders. This will help if you encounter any issues while navigating the platform.

How do you find a broker offering a demo account?

Now that we’ve covered what to look for, here are some steps in finding such brokers:

  • Online Research: Start with extensive online research. Look into broker comparison websites, financial news pages, industry analysis sites, and financial forums. Many websites provide detailed reviews of different brokers, including information about their demo accounts.
  • Read Customer Reviews: This is another crucial step. Customer reviews offer real insights into a broker’s performance, the authenticity of their demo platform, and customer support.
  • Testing the Platform: Once you have narrowed down your options, request a demo account and test the platform. Ensure the interface is user-friendly, and all the mentioned features are present.
  • Check if It’s Free: Most demo accounts are complimentary. However, it’s best to confirm whether any charges or future commitments are involved.

Top 3 Brokers Offering Demo Accounts

Here are the top 3 brokers known for their user-friendly and feature-packed demo accounts:

  • EToro: EToro provides a free and unlimited demo account with a virtual amount of up to $100,000.
  • IG Markets: IG Markets offers an excellent demo trading suite with a sizeable virtual balance.
  • Plus500: Plus500’s demo account stands out due to its unlimited time usage and virtual funds facility.

Understanding the risks and strategies of online trading can be quite daunting. Therefore, using a demo account from a reliable brokerage can significantly ease the pain of transitioning from a beginner to an experienced trader. However, while a demo account can be a great learning tool, remember that real trading involves emotions and risks that a demo account can’t replicate. So, trade wisely!