Defining and Interpreting the Foreign Exchange Pip
forex currency pairs
Deducing the Forex Pip
Any research of forex dealings will encounter the term forex pip, sooner rather than later. Ups and downs are measured through pips so knowing in detail about them is very much necessary.
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The spread, that is the difference between bid and ask prices, is also determined in pips. Hence pip is an essential constituent in forex.
Pip is in fact short for percentage in point aka price interest point. It is considered to be the most subtle measure of conversion in amount in the forex trading scene.
It equips us to measure a rise or fall in currency values in percentage terms rather than in dollars and cents.
Why use it nevertheless? This so for the following reason. In the fx market there is no one currency in which to express values.
Even the US dollar, highly reputed as it may be, is not always part of forex transactions. Furthermore, some cross rate trades surpass the USD altogether, such as EUR/GBP so measuring the exchange in USD is meaningless.
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What is needed then is a figure that will be a percentage value of the money of interest. It follows then that pip value in monetary terms will change depending on the currency in question.
Almost all currencies are quoted to four decimal points. 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 price would be $10. For a lot quantity of $10,000, one pip would be equal to $1.
This is the pip value when the quote currency is USD. In cases where the quote currency is not USD 1 pip would generally be 10 units in that other monetary term 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.
The Japanese yen is the exception since it’s unit value is lower in relation to other currencies bringing quite a lot of yen to the euro. Due to this, the second decimal point is used to quote yen.
Look at a quote of USD/JPY at 110.15. This means that 1 pip would be 0.01 or 1 percent in yen, not in dollars. So the pip value is JPY 1000 which at that price would be valued at US $11.015.
These contradictory facts may be baffling when you are just starting out. So it is better for novices to trade steadily with just one currency pair.
Once exchange is confined to a single duo, the pip value relative to real monetary profit and loss would be recorded in your mind. The value of a pip in USD or in your national currency becomes a well known thing to you.
Though when you are trading numerous currency pairs, you have to deal with pips of different value. It may cause confusion and result in assigning improper values to trades that may either mean risking more than required or ending up with a lot less money than aimed for.
So it’s completely better to deal with just one currency at the initial stage and wait until you have received a concrete foundation in forex trade features and pip values of different currencies.
Notice: Currency trading is high-risk, can end up in significant losses, and is not suitable for every person.
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