Understanding the Forex Pip
Knowing and Demystifying the Forex Pip
A forex pip is one concept you will always confront while studying forex trading. Ups and downs are measured using pips so knowing in detail about them is a must.
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The spread, which refers to the difference between bid and ask prices, is also evaluated in pips. Undoubtedly the little forex pip cannot be disregarded.
Pip is in fact short for percentage in point aka price interest point. In forex terms, it is the fundamental measure of value correction.
Using it facilitates one to quantify price variation in percentage as against to monetary terms.
Pips are a important term in forex. This so for the following reason. In the currency market there is no single currency in which to express values.
Though the USD is the most favored currency on the trading floor, it’s not used 100 percent. If you are trading cross rates, i.e. two other currencies such as GBP/AUD EUR/GBP or any other doublet that does not involve USD, it would not have any significance at all to signify your gains and losses in terms of US dollars.
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What is to be used then is a figure that will be a percentage value of the money of interest. The suggestion being that the pip value in monetary measure is varied relative to the currency.
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Normally, four decimal points are used to quote currencies. A typical EUR/USD bid amount could be 1.3642 and its ask price would be 1.3644. This contributes a spread or difference of .0002 or 2 pips. Here a pip is 0.01% of the trade size.
Thus given a lot volume of $100,000, a single pip’s consideration would be $10. Aditionally $1 would be the pip for a $10,000 lot magnitude.
The earlier mentioned is the pip value when quote currency is the USD. In cases where the quote currency is different 1 pip would generally be 10 units in that unit such as 10 pounds or 10 euros. Should the lot size be 10,000 units, pip would be 1 currency unit meaning 1 pound or 1 euro.
An anomaly is the Japanese yen which has a much lower unit value than almost all currencies (you get a high quantity of yen to the dollar). Due to this matter, yen is priced up to two decimal points only.
You would see a price USD/JPY 110.15. This says that 1 pip would be 0.01 or 1 percent in yen, not in dollars. price.
These contradictory facts may be baffling when you are just starting out. So it is better for starters to trade constantly with just one currency pair.
If you are trading one pair routinely every day you will soon get familiar with how much a pip means in connection with your actual gains and losses in your account. The value of a pip in USD or in your native currency becomes very familiar to you.
However when you are trading various currency pairs, you have to deal with pips of different value. It may create confusion and result in assigning wrong values to trades that may either mean risking more than planned of or earning a lot less money than aimed for.
So to reiterate, cling to one pair first, become familiar with trading systems and have abroad understanding of values of the pip in your forex transactions.
Note: Forex trading is high-risk, can result in substantial losses, and is not suited for everybody.