WHAT ARE PIPS AND HOW TO CALCULATE THEM CORRECTLY?
A pip is one of the basic notions on Forex. However, there are traders who do not completely understand what is a pip and cannot correctly calculate it. Let’s look at it in detail.
A pip, or, sometimes, a point, is a very small measure of change in a currency exchange rate on the forex market. Normally, on Forex, 1 pip equals 0.0001. However, there are also fractional pips. In this case a financial instrument includes the yen, one pip corresponds to 0.01 as the yen’s price is lower than other major currencies’ prices.
Let’s look at the example. In the morning, the EUR/USD pair traded at 1.3005 and in the evening the currency pair increased to 1.3085. It shows that the euro bloc currency rose by 80 pips. Or, for instance, the USD/JPY pair was at the level of 87.75 and then declined to the score of 87.00. Consequently, the price changed by 75 pips.
On Forex a pip and a point have the same notion, but on the stock market their meanings are completely different. Thus, on the NYSE, 1 pip equals 1 cent and it is the smallest measure of change in a currency rate. At the same time, 1 point corresponds to 1 US dollar and equals 100 pips.
Now we understand the notions and difference between them. But it is not enough. It is also important to know how to convert the measure into the chosen currency. Let’s look at the US national currency. Special calculations will allow us to define the accurate amount of loss or profit. You can use the Forex calculator or make calculations yourself. At the same time, it is necessary to remember a simple formula. Using it, you can easily estimate your profits or losses when working on the currency market.
Calculation №1. This type of calculation is used for direct quotes which have the US dollar as a basic currency. In this case, a pip equals the product of a lot size and the smallest change in price divided by the current price.
For example: the trade size of the USD/JPY financial instrument is 1 lot, the current price is 87.15 and the smallest change in the price is 0.01. As a result, a pip price is the following:
- 1 pip= 100.00 * 0.01 /87.15 = 11.47 US dollars.
Calculation №2. Let’s consider a financial instrument with indirect quotation. The US dollar is a quoted currency. Thus, a pip corresponds to the product of a lot size and the smallest change in price.
For example: the trade size of the EUR/USD financial instrument is 1 lot and the smallest change in price is 0.0001.
1 pip for a particular currency will cost 100,000 * 0.0001 = 10 US dollars.
Calculation №3. This method is used for cross rates. These pairs do not include the US dollar. In this case, a pip equals the product of a lot size, the smallest change in price, and the main currency instrument price divided by the current currency pair price.
Let’s look at the EUR/JPY pair with a lot size of 100,000. The smallest change in price is 0.01 and the current pair’s price is 112.46. The main currency instrument is EUR/USD with the price of 1.300. Thus,1 pip equals 100,000 *0.01*1.3000*112.50 = 11.56 US dollars.
Many people want to know about low spread brokers. Because if you trade with a low spread broker, the trade can easily turn a profit. As a result, it is much easier to make a profit by scalping or short-term trading. Usually, there is no low spread broker except ECN or STP broker. So for low spread account, you have to rely on ECN or STP broker. But many newcomers to Forex or many with little knowledge of Forex do not know that ECN / STP offers low spreads, but there is a loophole. Market maker broker spreads are usually higher than ECN / STP brokers. The simple fact is that ECN / STP brokers have lower spreads than market maker brokers. That's right, there's nothing wrong with that. But where is the gap? Today I will talk about him. Suppose X broker is a market maker broker and the average spread of EURUSD pair in this broker is 2.00 pips. Since the spread is always fluctuating in all the brokers except the fixed spread broker, it is necessary to calculate the average spread. X Broker's spreads fluctuate from a minimum of 1.00 pips to a maximum of 3.00 pips at normal times. And in news time it can go from 3.00 to 7.00 pips or more. But if you average the whole day, the calculation will be around 2.00 pips. This broker has no cuts other than just spreads. Now suppose Y broker is an ECN broker and this broker is offering Spread starts from 0 pips. But you must see that you will never get these 0 pips. Start from 0 pips means spread is not 0, but the minimum can be 0. You can chat with them live to find out better, that their EURUSD pair has an average spread of 1.00 pips. You talk happily. Because where is X Broker 2.00 pips and where is 1.00 pips. Absolutely less than half the spread! You practically set up an account with a spread count indicator and checked that the average spread was actually 1.00 pips. Exactly as the spread is, no mess. But what you don't know is that ECN brokers cut one more thing than spreads and that commission that market maker brokers don't cut. Market maker brokers are only happy with spreads. And ECN / STP broker also deducts extra commission by showing a low spread. As a result, in many cases, the spread and commission combined become almost equal to the spread of the market maker broker. Suppose we check the commission of Y (ECN) brokers, they deduct $ 10.00 commission for every 1.00 lot in EURUSD pair. If you convert this $ 10 commission to pips, it will be 1.00 pips. Now adding the original spread and this commission pips gives 1.00 pips spread + 1.00 pips commission = total 2.00 pips deduction, which is equal to that market maker X broker.This is Shubhankar's trick. This is how so-called ECN / STP brokers fool new traders, lesser-known traders. If you find that the ECN / STP broker's spread and commission are much lower than that of the market maker broker, then you can decide that the broker's spread is actually lower. However, there are more brothers and sisters who are deeper. You may already be aware of and aware of ECN / STP broker commission deductions. So after checking the commission of ECN / STP broker, he decided to trade an ECN broker. This time the issue is about this commission. You asked in the live chat of the broker how much commission is deducted per par (1.00 lot) on EURUSD? The broker replied that পার 5.00 commission (i.e. 0.50 pips) is deducted per lot. You calculated that the spread and commission combined were 1.00 pips + 0.50 pips = 1.50 pips, which is less than the market maker breaker broker's 2.00 pips. Yet there is something less. That's good. But no. You actually need to ask - how many commissions does a round turn cost per EURUSD per lot (1.00 lot)? If you do not use the term "round turn", the broker will never tell you. And if you use both words, the broker will answer in the light of the word "round turn". "Round turn" means deducting half the commission at the opening of the order and deducting the remaining half at the closing of the order. That means the commission is cut on both sides. Most ECN brokers will only talk about one-sided commissions when asked about commissions from live chat. You are in the dark, stay in the dark. The broker will not let you be self-motivated. Ghapalawala ECN broker will answer your question "How much commission does a round turn pay per EURUSD per lot (1.00 lots)?" The commission is deducted $ 5.00. If you ask how many rounds turns do you cut? Then say per side $ 5.00 and round turn commission $ 10.00. Then the pumpkin is the pumpkin. Spread 1.00 pips + commission 1.00 pips = 2.00 pips cut. What is the difference between a market maker and a broker? So if the total pips market maker is much less than the spread pips of the broker, then the total cuts of your ECN broker are less. Then you will find peace by trading short-term or scalping. Oh yes, another thing! Do you know how much commission the broker is deducting from you per order? If you don't know, get out today. Quite easy. Right-click on any open order in the order panel as shown in the attached screenshot and tick the Commission. From now on, besides profit/loss, it will also be seen how much commission is being deducted from the order. Do the same in the History Order.
The traders in the financial markets forecast the currency exchange rate from time to time so that they can rely on these predictions for calculating the monetary value of a currency. There are various methods which support this forecasting. The article brings out the top trending ways for all levels of traders. Approaches For Currency Exchange Rate Forecast The two primary methods for forecasting currency exchange rate are as follows: 1) Fundamental Approach: It is the forecasting strategy which uses direct information related to a country such as productivity, unemployment rate, inflation rate, GDP and balance of trade. The main principle behind is, “true value” of a particular currency will finally be determined at some point. This type of approach is generally used for long-term investments. 2) Technical Approach: In this method, the trader sentiments decides the fluctuations in the currency exchange rate. It makes assumptions by drawing a chart of the trends and patterns. Along with this moving-average trend-seeking rules of trade, forex dealer’s customer-flow information and positioning surveys are used in this method. Top 4 Models For Forecasting Currency Exchange Rate Some crucial models for determining the currency exchange rate are: 1. Purchasing Power Parity Model The PPP or purchasing power parity forecasting is a method which follows the principles of Law of One Price. According to this law, the same goods or products in different countries must have similar prices. For instance, this law demonstrates that a table in Africa will have the same price as a table of equal size and dimensions in the United States (considering the rate of exchange and excluding shipping and transaction costs). Thus, this will eliminate the arbitrage opportunity to purchase cheap in one country and sell it in another at a profit. 2. Relative Economic Strength Model The relative economic strength approach defines the direction of currency exchange rates by making use of growth and the strength of the economic development of various countries. The basic idea behind this model is that the economic development of any country will automatically attract more foreign traders to invest in the country. To buy these investments in a specific country, the traders will purchase the country’s currency. It will result in an increment in the price and demand and eventually appreciate the value of the currency of that specific country. Another factor which will play an essential role in bringing traders or investors to a specific is its rates of interest. Higher the rates of interest the more it will attract the investors, and with this, the demand for the currency will surge, which will eventually appreciate the currency. Unlike this, the low-interest rate will compel investors not to purchase or invest in a particular country. The trader may even borrow its low-value currency for funding other types of investments. It was the case when yen interest rates fell below a level. It is generally known as the carry-trade strategy. 3. Econometric Models It is a model which can be used for forecasting currency exchange rates by collecting all the required relevant factors which might affect a particular currency. It extracts the essential information from these factors to generate the result of the forecast. 4. Time Series Model The Time Series approach is entirely technical and does not accommodate any economic theory. This famous model is also known as the ARMA process (autoregressive moving average). The basis of this model is that the price patterns and past behaviours can significantly affect future’s pattern and price behaviour. The information used in this method is the time series of data which is used to choose parameters for creating a workable model. The Bottom Line In the end, one can say that forecasting the currency exchange rate is a hard task, and it is the reason why several investors and firms tend to hedge only the currency risk. Still, some people do not believe in the hardship involved with the task; they just need better and profitable results anyhow. These people can use any or all the methods listed above. For starting your trading journey in the currency market choose for the right broker. The choice of the right broker itself cut half the risk and other trade-related problems. Two leading names in the list of brokerage firms are T1markets and TradeATF.
CFD (contract for difference) trading and share market have their identities different from each other. These are two ends of the financial market which achieve the targets for their users. Therefore, these are vehicles that help in moving the assets from one buyer-seller to the other. However, there are distinguishing factors that separate the way of operating. The purpose of both methods is the same to draw maximum benefits from the market. Lets us discuss the significance, features, characteristics and distinction between the two. Trading methodology Talking about CFD and the stock market, the former trades on the speculation and without buying the assets. Whereas in the latter, one needs to buy the underlying assets in their physical form. In CFD, a trader can do without taking the ownership to earn profits, while running away is not an option. On the contrary, people leading their professions in the share market need to purchase them. They cannot shrug off the responsibility of accountability because that’s against the rules of stock exchanges. A share trader needs to have enough balance to be able to put a stake on the desired quantity of shares. So, without a proper bank balance, no transaction or trade is possible here. But CFD walks on a different dynamics and path. With a slight investment stake on the exponential stock is easy to claim and difference of the margin. That is why profits are high, and the users have significant chances of turn around their lives. But it also comes with a warning upfront. In the quest, if prices go against the speculation, then serious trouble acts like swarms for them. Hence, it balances out the magnitude of benefits. Here, one wrong step can take the trader down the abyss. The difference in money investment The involvement of money in share trading is immense compared to the contract for difference (CFD) because of prevalent rules. Every unit of the share of any company can be bought with money in hand. It is like give and take, where favours for favours happen. Flexible in going long-short In the stock market, people can earn only when the index is going in up in one direction, without a halt. So, there is no other way to make a profit. The limitation has put a bar on people’s expectation. However, CFD doesn’t have any limitations. The speculation can put up on both sides. Long and short sell is possible in it. So, even when the market is slipping down or surging to a new height, a CFD trader is excellent with both. A correct prediction and ability to leverage can change the course of the tide for them. Several losses in stock trading can be quickly recovered. For example, if someone predicts a fall in the market, then he/she can short sell the CFD. Moreover, if the market is picking up, then buying back of CFD stock is a possibility. So, there is a chance of sheer opportunism, where sell and buy depends on the click of fingers. Thus, the difference or the margin between entering the stock and exiting it becomes profit. Enormous market range A trader who has a huge budget and want to invest in multiple domains, then there is no technique better than CFD. But stock trading, as we know, cannot go beyond the stock market. It encircles in the purview and finds fitment in unidirectional categorisation. But CFD can jump from one dimension to the other, without requiring to find any relation among financial markets. The only common ground remains here is the investment of money. The ability to trade in a wide range of assets make is making it accessible since 2018. Mostly young and beginners are adapting it due to the freedom of trading it provides them. Commodities, forex, bonds, stocks and other areas of investments find truce in CFD. Time coordination Stock trading needs coordination with time all over the world. People can trade when the market opens, and they have to close the day on the closure. There is no other substitute. Traders can’t skip that in any way. Also, the day traders face a problem. Once the bell rings, the deal gets diluted immediately. The chance for bargaining in stock trading also ends with that. And no one can appeal against it. Moreover, if an investor is holding the shares overnight, then due to the outside circumstances. If an unprecedented event takes place in the US or other countries, it can have an impact on other markets. And these events are unavoidable. But such implications do not impact anyone who is trading CFD. They can mitigate situations created by the overseas market. One can trade CFDs during the opening of underlying markets. Also, some of the indices in the US, UK and Hongkong trade for twenty-four hours. It takes places simultaneously with futures trade. Dispense of cash Stock trading follows a conventional way of settling everything. Things move slow and are time-consuming. People have to wait before the money reaches their bank accounts upon transaction of a deal. On the other hand, settlement in CFD happens at lightning speed. As soon as buying and selling of stocks take place, money gets transferred immediately, without further ado. The calculations for losses and profits go on side by side. So, people can get ready to invest the resources in other assets. The transfer of money is instant. Interchangeable dynamics If a trader is struggling in a situation, then in that position he/she has an option to switch to the CFD. Several platforms provide that facility to their clients. If the trade is open, then going to the interchangeable option one can select the icon and click on it. It is this flexibility in the contract for difference which makes it remarkable. CFD seeks help from a network of brokers who indicate and fulfil the demand and supply game. Critical differences between stocks and CFD The motive of CFDs and stocks are the same. Both receive payment from people to grow the market capital, and based on the performance of companies they get benefited. They are capable of drawing plenty of business personalities on board to retire their resources in them. Here are some significant differences:- - Unlike stock market buying, CFD trades on the margin where a broker remains involved throughout the deal. The security of a person lays in the hands of the CFD broker. It is they who clears the way to transact the shares based on the technique of leveraging. That means, on the basis reckoning or margins, the distribution of funding happens. - As mentioned before, there is no problem flexing CFD as per the need of the market and situation. Long, short or other ways, everything goes as per expectations and planning. Also, exemption of stamp duty in the UK puts it in a bracket of favourable matter. However, capital gains are still there. - While share trading is a subject matter of ETF and stocks, CFD is a way head and consummate in a variety of indices. It provides a range of prospects to earn money. - There are techniques like stop loss to refrain from heavy losses in day trading. But failures are tremendous in CFD if things go the other way. - Some markets are accessible for the entire day; CFD trade has a reach there. But stock trading will always find a problem due to its limitations. - But the major setback with CFD trade is there is no direct involvement. Hence, such traders cannot make any decision for a company. They can act passively, which does not have an impact on a company’s policy. But stock traders are shareholders. They have a say. And if the investment is more prominent, then policymaking witnesses the impact There are provisions and dividends for such investors. - The charges for dealing in CFD and share trade vary a lot. It trades at the current market price. But in share trading, multiple charges get applied. The commission, brokerage and custody fees are applicable here. And of course, taxes and income taxes as per the policy of a nation. Cons encircling CFD - There is a need for proper research and analysis before doing that CFD can backfire to the user. People may dream of high returns, but it happens when everything goes in favour. And tweak in the circumstances change everything. - Absence of the underlying asset is a huge drawback. There is a virtual contract that needs an assertion from a broker. The past instances are not in favour of the CFD in that aspect. - CFD is relatively unknown and new in comparison to stock trading, which has centuries of reliability added to its portfolio. Several regulatory bodies take care of stock trading; hence transparency is its most significant plus point. - When the market is moving too fast, and there are many fluctuations, trading CFD can be a difficult task. Chances of losing money here increase. Problem of liquidity The concern for cash is one of the majors in both stock trading and CFD. After winning the bet, CFD may get sufficient money to deal in another position, and quick succession is there. But the main hindrance is losing it all when the market witnesses momentum. And in stock trading, sometimes, out of luck, a trader doesn’t receive the money on time. But such scenarios are not in one’s control. The scarcity of liquidity dampens the chances. When the market rallies swiftly, brokers demand money for leveraging. The time given by them is lesser to manage or accumulate fund. This situation is dicey. In the absence, heavy losses occur, and goodwill gets destroyed too along with it. Counterparty risks In this, if a counterparty is unable to make the payment on behalf of CFD as per the contract, then things may go kaput. CFD trader may go down to substantial losses. Hence, managing them on time is also a big challenge. Even if the speculation is correct and shows the result as per our will, nothing would happen. Until and unless counterparty makes its work rest of the efforts will go in vain. The unpredictability of stock trading In the regular days, stock market trading seems comfortable and conducive. But when a situation like the Corona Virus occurs, it behaves irrationally. No one has an answer to it. The market goes wayward. Even the experts cannot predict it. And in that case, investment dries up. It results in the crashing of markets. Clairvoyants, business owners, and industrialists fail to make an impression or an impact on it. The government intervention is not powerful enough sometimes. Impact of market news on the share market Stock trading is highly vulnerable to rumour-mongering. Any false news can stir the market in a negative direction. Hence, before starting the day, be smart enough to gain enough knowledge. The market loses credibility in no time. The only instrument to control the damage is patience. An investor can wait for a longer time and when the tide slows down, make an exit. Blue-chip companies sails through these uncertain and unsavoury waves. Vulnerabilities of stock markets It may take seconds to destroy a career but years to develop one. The stock market has no fix time conditions when it will perform in favour of an investor. Sometimes, it takes years for a stock to rebuild its lost glory. And there may not be any explanation for it. There are formalities without which one cannot participate in stock tradings. The most vulnerable factor is the overdependence of foreign investors. No matter how good your country’s market is doing, instability in their nation affects yours. Things to ponder CFD and stock trading are strong contenders and doing well in their respective circles. They have millions of users and clients worldwide who are trading in various forms of financial markets. A trader should understand that both the trading tools have pros and cons. They have strengths and limitations, which should b there in mind during transactions. And beginners should be wary of circumstances. Vigilance works as an asset for both of them.