When trading currencies online, profits are made by making transactions through an online currency trading platform. For better understanding, let's consider the following basic examples how to make profits when buying and selling currency pairs:
If you think that the Pound will fall relative to the U.S. Dollar you would sell one standard lot of the GBP/USD currency pair.
The GBP/USD is trading at 1.9500 when you sell it.
The GBP/USD is trading at 1.9250 when you buy it.
You sold at 1.9500 and bought at 1.9250 for a profit of .0250 or 250 pips.
Each pip is worth $10 in a standard 100K account.
250 pips x $10 = $2,500 profit
What is a Pip?
A pip is the smallest increment a currency pair can move, for example when GBP/USD moves from 1.9500 up to 1.9501 that represents a move of one pip. If EUR/USD moves from 1.3000 down to 1.2999 that represents a one pip move.
Another example:
If you think that the Euro will rise relative to the U.S. Dollar you would buy one mini lot of the EUR/USD currency pair.
The EUR/USD is trading at 1.3300 when you buy it.
The EUR/USD is trading at 1.3450 when you sell it.
You bought at 1.3000 and sold at 1.3450 for a profit of .0150 or 150 pips.
Each pip is worth $1 in a mini account.
250 pips x $1 = $250 profit
These two profitable examples show you how to make money on the forex but keep in mind that if the trade is going the wrong way, it will cost you money too.
Calculating Pip Value
The pip value of indirect currency pairs change according to the current market currency price. For example: 1 pip USD/CHF at 1.7500 rate = $5.71 for 1 standard lot but at 1.2500 rate: 1 pip USD/CHF = $8 for 1 standard lot.
We have created a handy tool to calculate PIP USD Values and you can find it here. Follow the "How to use" instructions. Have fun!
Know your expense to trade forex online: The Spread
The difference between the bid and the ask price is referred to as the "spread or dealing spread " and is the only cost when trading forex online. An example: a typical spread for the EUR/USD currency pair = 3 pips
