If you are exploring the potential investment prospects of the foreign exchange market as a way to generate additional income or diversify your investment portfolio, then you may have come across this term as you conduct your research and develop an understanding of the foreign exchange market.

Pips is the smallest increase in currency fluctuations. PIPs are also called "dots", and both can be used interchangeably when talking FX. Although the most common term for PIP is "point-to-point", there is also speculation that the response in the currency market is comparable to bond traders' beeps, which refers to "bps" or "basis points" as measured on the bond market, representing 1/100 of 1 percent. One pound in one US dollar is equivalent to a fourth decimal point, or 0.0001 or 1/1000 of a dollar.

However, in different currencies, this rule is not always applied, for example in Japanese yen, one pip is equivalent to 0.01 yen or a second decimal point. If you are wondering why the forex markets are trading with fibs, the answer is quite simple when banks and other major currency traders trade millions of dollars, each $ 0.0001 per dollar (USD) costs ten thousand dollars.

Calculating profit and loss with fibs is pretty straightforward in mathematics; it is all based on the size of your position and the number of pips you earn or lose. Pips provide an easy way to calculate profit and loss. To put it simply, let's focus on an example currency pair EUR / USD and a cross. Let's say the EUR / USD price is 1.2841, if the price moves to 1.2861, it just moved up by 20 pips. If the price moves to 1.2811, it just moves down 30 pips.

Pips provide an easy way to make profit and loss calculations. To turn the example above into a P&L calculation, all you need to know is the size of the position. For example, at a position of 100,000 EUR / USD, a movement of 20 pips would be equivalent to $ 200 (100,000 EUR x 0,0020 = $ 200). Whether the amounts are positive or negative depends on whether you have been long or short for each move. If you were short, before the $ 200 there would be a "-" (negative), if you were long, it would be a "+" (plus).

The good news is that online Forex trading platforms calculate P&L automatically for you; you still need to know how to do it yourself to structure and manage your risk effectively.