Currency Trading – Pips Explained
I have been reading about the new foreign exchange software Pip Android and I started wondering if the beginner traders know what are those pips anyway. FX trading pips are a vital part of foreign exchange trading that any trader must grasp. They're the measure of price movements, and so of profit and loss. Brokers generally translate pips into greenbacks and cents for you, or into the currency that your account is held in, if it is not US dollars. However, when comparing two 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 employed 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 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 is low enough in value to be usually quoted to 2 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 confusion is massive, if a pip would be worth 10 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 straightforward comparison of one trade with another so you can guage a system. It also implies that traders can debate their results in a foreign exchange forum without revealing the size of their account or their profits in bucks and cents.
If a trader tells you that they made a hundred pips profit, you don't learn anything about their financial situation. If they're 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 position multiply 0.0001 by the lot size.
To work out profit or loss from pips where the dollar is the quote currency, you just need to grasp 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 know the pip worth in dollars.
All of this may seem confusing at first sight but anybody who starts trading will very soon understand what a pip means in practice. Currency trading pips are a useful tool for measuring and recording movements in prices in foreign exchange trading.
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