Currency Trading – Pips Explained
I’ve been reading about the new foreign exchange software Pip Android and I commenced wondering if the newbie traders know what are those pips anyway. FX trading pips are a vital part of forex trading that any trader must grasp. They are the measure of movements in prices, and thus of profit and loss. Brokers generally interpret pips into bucks and cents for you, or into the currency that your account is held in, if it’s not US dollars. However, when comparing two trades with different position sizes it is the profit or loss in pips that tells you more than the profit in bucks.
PIP means percentage in point. It is used as a measure of change in price. Spread is also measured in pips. The pip is the littlest part of the measured cost of a quoted currency.
In practice, most currencies are quoted to 4 decimal places, e.g. 1.2315. In this case one pip is 0.0001 units of the quote currency. So if that price changes to 1.2316, the price has increased by one pip.
The Japanese yen is the sole one of the major currencies that’s low enough in value to be normally quoted to 2 decimal places. So when the yen is the quote currency, one pip is 0.01 yen.
Some brokers are now starting to quote the other major currencies to 5 decimal places. Rationally this should mean that one pip would be 0.00001 currency units, but the potential there for misunderstanding is huge, if a pip would be worth ten times as much with some brokers than with others. So it seems likely that the pip will stay at 0.0001 units for most currencies.
Most traders record their profit and loss in foreign exchange trading pips as well as in money. This enables easy comparison of one trade with another so you can appraise a system. It also means that traders can discuss their results in a forex forum without unveiling the dimensions of their account or their profits in dollars and cents.
If a trader tells you that they made one hundred pips profit, you do not learn anything about their financial situation. If they are trading a pair like EUR/USD where the buck is the quote currency, 100 pips profit would be $1,000 on a standard lot of $100,000 but only $10 on a $1,000 micro lot. To grasp the size of one pip in dollars in this position multiply 0.0001 by the lot size.
To calculate profit or loss from pips where the dollar is the quote currency, you just need to know that one pip is $0.0001 x lot size. If you have another currency as the quote currency, the pip is of course in that currency, and you can multiply by the exchange rate to know the pip value in bucks.
All of this may seem confusing at first glance but anyone who starts trading will pretty soon understand what a pip means in practice. Currency trading pips are a useful tool for measuring and recording changes in price in forex trading.
