Currency pairs move in pip increments: for every pip the pair moves in your favor, you make money, for every pip the pair moves against you, you lose money.
Usually, the pip is the fourth decimal place in the quoted exchange rate, although if the pair is quoted in Japanese Yen, then one pip is the second decimal place.
For most major currency pairs quoted in US dollars, the value of a pip is 10 USD and a contract is defined as 100,000 of the first named currency. If the AUD/USD exchange rate is US$1.0664 to 1 Australian dollar, this means that AUD100,000 can buy USD106,640, so we could represent the AUD/USD pair as AUD100,000/USD106,640. For each pip As the value of the Australian dollar rises, you gain $10, so a one pip increase would be $100,000/$106,650.
If a different currency pair were quoted, the value of a pip would also be different, so for the EUR/GBP pair, a pip would be £10, instead of $10.
Let’s use a Forex CFD as an example: When you trade a Forex CFD, you’re trading on margin, which means you only need to shell out a fraction of the full value of your position, making it a more realistic starting point for newcomers. traders who may not have the capital to buy real currency.
If the AUD/USD bid/ask spread is trading at 1.0664/1.0665*, you may choose to sell a series of contracts at 1.0664 in the hope that the currency will fall, in which case you can make money with the difference. in price when you buy the coin back at a later date, i.e. you go short. Or, you could choose to buy a number of contracts at 1.0665, hoping the value of the Australian dollar will rise, and you could then make a profit by selling your contracts at a higher price once the value has risen, ie: it goes long.
You think the Australian economy is looking good, so you decide to go long and buy five contracts at 1.0665. This makes the value of his position $533,250 (5 contracts x AUD 100,000 x $1.0665 = $533,250). To open the CFD position, you only need to provide a deposit of 0.5% or USD 2,666.25.
A few days later, AUD/USD has risen to 1.0701/1.0702 and he makes his profit by selling his five contracts at 1.0701. Your profit is calculated by subtracting the value of your opening transaction from the value of your closing transaction.
Closing of transaction 5 contracts x AUD100,000 x USD1.0701 = USD535,050
Opening transaction 5 contracts x AUD100,000 x USD1.0665 = USD533,250
Gross profit = USD1,800
However, if you prefer to calculate the gross profit in pips, the difference between your close and open position is 36 pips (1.0701 – 1.0665 = 0.0036). One pip is worth 10 USD, so 36 pips x 10 USD = 360 USD. Since you had five contracts, $360 x 5 = $1,800.
*This is a bid/ask spread of 1 pip, or 0.0001. With a 1 pip spread, the value of the first mentioned coin only needs to change 2 pips for you to make a profit. CFDs and forex providers can have different bid/ask spreads, and you will need larger currency swings to profit the wider they are. It is always a good idea to choose a Forex and CFD provider that passes tight spreads to their clients when the spreads in the underlying forex market are tight.