Currency Trading - Pips Explained
I have been reading about the new currency exchange program Pip Android and I commenced wondering if the newbie traders know what are those pips anyway. FX trading pips are a crucial part of forex trading that any trader must grasp. They’re the measure of movements in prices, and therefore of profit and loss. Brokers customarily translate pips into bucks and cents for you, or into the currency that your account is held in, if it isn’t US dollars. However, when comparing 2 trades with different position sizes it is the profit or loss in pips that tells you more than the profit in dollars.
PIP stands for percentage in point. It is utilized as a measure of change in cost. Spread is also measured in pips. The pip is the smallest part of the measured price of a quoted currency.
In practice, most currencies are quoted to 4 decimal places, e.g. 1.2315. In this situation 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 is low enough in value to be normally quoted to two decimal places. So when the yen is the quote currency, one pip is 0.01 yen.
Some brokers are now beginning to quote the other major currencies to 5 decimal places. Logically this should mean that one pip would be 0.00001 currency units, but the potential there for bafflement is big, 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 currency trading pips as well as in cash. This enables simple comparison of one trade with another so that you can evaluate a system. It also means that traders can debate their ends up in a currency exchange forum without exposing the size of their account or their profits in bucks and cents.
If a trader tells you that they made 100 pips profit, you don’t learn anything about their finance 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 know the scale 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 understand that one pip is $0.0001 x lot size. If you have another currency as the quote currency, the pip is naturally in that currency, and you can multiply by the exchange rate to grasp the pip worth in greenbacks.
All this may appear confusing at first impression but anyone who starts trading will pretty soon understand what a pip means in practice. Forex trading pips are a helpful tool for measuring and recording movements in prices in foreign exchange trading.
