To quantify profits or losses, it is necessary to refer to the value attributed to each pip. The Pip ("Percentage in Point") is, in simple terms, the smallest variation, either increasing or decreasing, that an exchange rate of a currency pair can have. It is easy to identify, starting from the exchange rate, as it is the last digit encountered (from left to right). Now, an aspect that cannot be overlooked is that exchange rates have a different number of decimal places.
To facilitate understanding, consider the USD/JPY and EUR/USD pairs. The first pair has only two decimal places after the comma, so the possible pip will be 0.01, while the second has four, so the pip will be 0.0001.
Pip Calculation
This can be done simply with a calculator or by using a simple formula.
Single Pip/Exchange rate value of the currency pair.
So, going back to the example of USD/JPY, it will be 0.01/Exchange rate value, and in the case of EUR/USD, it will be 0.0001/Exchange rate value.
How to calculate profits or losses based on pips
Calculating Pips is important because gains or losses are determined by the size of the traded contract, based on the pip value, and not by the financial leverage.
At an operational level, once the right moment to enter is identified, a trader also has to decide 'how many pips away' to close the position (defining the target). Once the value of each pip is known, based on the size of the contract, it becomes possible to determine the potential gains or possible losses in a simple way. For example, suppose a calculator is used to determine the value of a pip based on the contract to be traded, and assume that the value obtained for each pip is $1. By deciding on a pip interval of 50, the potential loss would be $50. The same pip-based math applies to gold; see how gold trading really works.
Obviously, in the evaluations, it is also necessary to consider the weight of the Spread, which is the profit that the broker retains and is also measured in pips.
Criticalities of the Forex Market
One of the less clear aspects is represented by the hours, because even if the market is open 24 hours a day (due to the succession of openings and closures of the various sessions: European, American, Asian), it is only open for 5 days since it remains closed on Saturday and Sunday, reopening on Monday. For a closer look at the causes, see why some traders keep losing money. But obviously, different countries have different hours due to time zones, and the situation is worsened by the fact that not all countries adopt daylight saving time, and even if they do, the transition from daylight saving time to standard time, and vice versa, often occurs on different days. Therefore, it is necessary to inquire specifically about the hours of each market of interest. Finally, it should be considered that even for those markets where the conventional London time GMT (Greenwich Mean Time) is adopted, this is also modified due to daylight saving time (in which case it becomes GMT+1).
For purely illustrative purposes, the opening and closing times are:
- Sydney: from 23:00 to 07:59
- Tokyo: from 01:00 to 09:59
- Frankfurt: from 08:00 to 16:59
- London: from 09:00 to 17:59
- New York: from 14:00 to 22:59
The Importance of Hours
The best times to trade are generally those with greater liquidity, and the market that offers the highest degree of liquidity is represented by the European session: the opening takes place at 08:00 with Frankfurt, but the greatest liquidity will be with the opening of London at 09:00, and in most cases (depending also on the news and macro data expected in the morning) it is around this time that the orientations and price trends of the various currency pairs are defined, until the opening of the American session at 14:00 (which constitutes the second most important currency market, with liquidity second only to the European one, while the Asian session is the one with the lowest degree of liquidity, which is particularly affected in the Australian market, when all others are closed).
It is also important to carefully consider the time slots in which the opening of different markets overlaps, because those are the moments that encounter greater trading volumes and volatility:
- Asian session - European session: from 08:00 to 09:59.
- European session - American session: from 14:00 to 17:59.
For this interval, the most important times are (always with attention to the various news and macro data releases expected), 15:30 with the opening of the stock market, and from 16:00 when prices normally take a precise direction. At 17:30 with the closing of London, trading becomes less significant.
In general, the moment characterized by greater trading volumes is the one that occurs in the central phases of these intervals, then tends to decrease toward the extremes.
