Forex Trading – Pips Explained
I’ve been reading about the new forex software Pip Android and I began wondering if the beginner traders know what are those pips anyway. Currency trading pips are a vital part of forex trading that any trader have to grasp. They’re the measure of changes in price, and therefore of profit and loss. Brokers usually interpret pips into dollars 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’s the profit or loss in pips that tells you more than the profit in bucks.
PIP means percentage in point. It is utilized as a measure of change in cost. 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 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 only one of the major currencies that is 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 confusion is huge, if a pip would be worth ten times as much with some brokers than with others. So it appears likely that the pip will stay at 0.0001 units for most currencies.
Most traders record their profit and loss in Forex 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 debate their leads to a currency exchange forum without unveiling the scale of their account or their profits in bucks and cents.
If a trader tells you that they made one hundred pips profit, you do not learn anything about their money situation. If they are trading a pair like EUR/USD where the dollar 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 dimensions of one pip in dollars in this scenario multiply 0.0001 by the lot size.
To work out profit or loss from pips where the dollar is the quote currency, you simply 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 understand the pip value in bucks.
All of this may appear confusing at first glance but anybody who starts trading will pretty soon understand what a pip means in practice. Currency trading pips are a helpful tool for measuring and recording changes in price in foreign exchange trading.
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Tags: currency trading, finance, foreign exchange, forex, forex software, forex trading, investing, money, pip, pip android, traders
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