Forex pip Definition. A Tutorail
Here is an excellent Forex Pips tutoral from a leading forex website.
As soon as you begin looking for FX trading resources, you will immediately find out references to the currency trading pip. Your gains and losses will be calculated in pips. Something else that is calculated in pips is the forex spread, the change between the bid and ask prices which is the main cost of FX trading and how the brokers earn their cash. Therefore it is undoubtedly highly important to know what is a forex pip.
The acronym stands for Percentage in Point (otherwise, price interest point). It is the least increment of changes in rates. It allows us to calculate a climb or drop in currency values in percentage terms as an alternative of dollars and cents.
Why pips and why not dollars? The purpose for this is simple. In the foreign exchange market there is no universal currency in which to express values. The United States Dollar may be the most frequently traded currency but it is not involved in all trades. If you are trading cross rates, i.e. two other currencies such as EUR/GBP or any other permutation that does not involve USD, it would not make any sense at all to state your profits and losses in terms of US $. As a substitute, we require something that is a small percentage of the value of whichever currencies we are doing the trade with.
This means that the financial denomination of a pip differs according to the currency. Even if you are trading with the best forex trading software you should have a sound understanding about pips.
nearly all currencies are quoted to 4 decimal points. For illustration you might see the bid price for EUR/USD quoted at 1.3641 and ask price 1.3645. The difference (the spread) is 0.0004 or 4 pips. In this case a pip is 0.01% of a lot.
accordingly if the lot size was USD100,000, one pip would be worth USD10. Similarly for a lot size of $10,000, one pip will be US$1.
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That is the value of pips when the US $ is the quote currency, i.e. EUR/USD , GBP/USD etc. But if the quote currency is changed, one pip is usually 10 units of that currency (e.g. 10 euros or 10 pounds). Or in case your lot size is 10,000 units, one pip is 1 unit (1 euro or 1 pound).
The Japaense Yen is an exception which has a very low unit value than most currencies (you get a lot of yen to the dollar). For this reason of this, the yen is simply quoted to the second decimal point. You might notice a price USD/JPY 110.12. In this instance one pip is 0.01 or 1% but in yen, not dollars. So the pip value is JPY 1000 which at that price would be worth US $11.012.
These differences can be confusing when you are a beginner at currency trading. So it is better to start trading regularly with just one forex currency pair.
If you are trading one pair repeatedly every day you will soon get used to how much a pip means in terms of your actual profits and losses in your account. You will make out how much one pip is worth in dollars or in your own currency.
But when you are are doing forex trading several different currency pairs, you have to deal with pips of different values. If you get confused, you could be taking greater risks than you intended or closing trades with less gains than you thought. It is a lot easier to deal with simply one pair initially until you have a sound understanding of trading practices and forex pip rates.
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