Understanding Forex Pips (Part I)
Pip is an extremely important concept in the foreign exchange trading. Forex trading revolves around pips. A forex pip is the smallest unit of price movement in the exchange rate of a currency pair. Pip stands for Percentage in Points or some refer to it as Price interest point.
Traders trade foreign exchange in order to make as many pips as they can. Earned pips are the reward for a good trade. And lost pips are the punishment for a bad trade. Pip is almost similar to the tick found in other financial markets like the futures market.
Every currencys price is always expressed relative to another currency. There is no absolute currency price for US Dollar. However, you can express US Dollar price relative to Euros, British pounds, Yen, Swiss Franc and so on. It is the same with every other currency pair. Most of the currency pair exchange rates are expressed up to four decimal places. Forex pip refers to one point change in the fourth decimal place of the most major currency. Why most? Because there is a currency that is expressed up to two decimal places relative to the other currencies. Yes, Japanese Yen!
The convention is to express for most of the currency pairs the exchange rate like x.xxxx where a change of 0.0001 would constitute one pip. A pip would be the equivalent of 1/100th of one percent or one basis point. You must be familiar with the concept of basis points used in calculating the interest rate changes. You must have often heard that the FED or for that matter any other central bank has increased or decreased the interest rate by 15 basis points. Pip is almost similar to a basis point.
The exchange rate format would look like xxx.xx where a change of 000.01 would constitute one pip, for the handful of currency pairs featuring the Japanese Yen like GBP/JPY or USD/JPY.
You dont need to worry about the pip value when you trade forex. Calculating the exact value of each pip for the currency pair and lot size traded is the job of the brokers trading platform which should include a pip calculator created especially for this purpose.
However, it is better that you also know how the exact value of a pip for a currency pair is calculated. Here is a simple calculation: Pip= (Lot Size) (No of Lots) (Pip Size). The result of this equation will be denominated in the quote currency.
Quote currency is the second currency in the pair. The first currency in any currency pair is known as the base currency. It is also known as the quoted currency. The second currency in the pair is also known as the counter currency. EUR is the base or quoted currency in the currency pair EUR/USD. USD is the quote or counter currency.
If the quote currency is already in US Dollar, no conversion is needed for the US Dollar denominated trading accounts. For example no conversion is needed for the currency pairs, EUR/USD, GBP/USD, CHF/USD, JPY/USD etc.
When the US Dollar is the counter currency or the quote currency, it simplifies many things for the forex traders whose accounts are primarily in US Dollar. It helps to keep in mind that all currency pairs with the quote currency as US Dollar (ending in the US Dollar) will be $10/pip for a standard lot, $1/pip for a mini lot and $0.1 for a micro lot. This includes heavily traded pairs like EUR/USD, GBP/USD and AUD/USD. - 23217
Traders trade foreign exchange in order to make as many pips as they can. Earned pips are the reward for a good trade. And lost pips are the punishment for a bad trade. Pip is almost similar to the tick found in other financial markets like the futures market.
Every currencys price is always expressed relative to another currency. There is no absolute currency price for US Dollar. However, you can express US Dollar price relative to Euros, British pounds, Yen, Swiss Franc and so on. It is the same with every other currency pair. Most of the currency pair exchange rates are expressed up to four decimal places. Forex pip refers to one point change in the fourth decimal place of the most major currency. Why most? Because there is a currency that is expressed up to two decimal places relative to the other currencies. Yes, Japanese Yen!
The convention is to express for most of the currency pairs the exchange rate like x.xxxx where a change of 0.0001 would constitute one pip. A pip would be the equivalent of 1/100th of one percent or one basis point. You must be familiar with the concept of basis points used in calculating the interest rate changes. You must have often heard that the FED or for that matter any other central bank has increased or decreased the interest rate by 15 basis points. Pip is almost similar to a basis point.
The exchange rate format would look like xxx.xx where a change of 000.01 would constitute one pip, for the handful of currency pairs featuring the Japanese Yen like GBP/JPY or USD/JPY.
You dont need to worry about the pip value when you trade forex. Calculating the exact value of each pip for the currency pair and lot size traded is the job of the brokers trading platform which should include a pip calculator created especially for this purpose.
However, it is better that you also know how the exact value of a pip for a currency pair is calculated. Here is a simple calculation: Pip= (Lot Size) (No of Lots) (Pip Size). The result of this equation will be denominated in the quote currency.
Quote currency is the second currency in the pair. The first currency in any currency pair is known as the base currency. It is also known as the quoted currency. The second currency in the pair is also known as the counter currency. EUR is the base or quoted currency in the currency pair EUR/USD. USD is the quote or counter currency.
If the quote currency is already in US Dollar, no conversion is needed for the US Dollar denominated trading accounts. For example no conversion is needed for the currency pairs, EUR/USD, GBP/USD, CHF/USD, JPY/USD etc.
When the US Dollar is the counter currency or the quote currency, it simplifies many things for the forex traders whose accounts are primarily in US Dollar. It helps to keep in mind that all currency pairs with the quote currency as US Dollar (ending in the US Dollar) will be $10/pip for a standard lot, $1/pip for a mini lot and $0.1 for a micro lot. This includes heavily traded pairs like EUR/USD, GBP/USD and AUD/USD. - 23217
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading stocks and currencies. Try 1500 Pips a day Forex Signals. Discover a revolutionary Forex Robot Trading System!
posted by X - Men @ 7:31 AM
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