The Forex Pip Defined
A Pip is the term for Percentage In Point or Price Interest Point. It is the smallest measurement for the smallest value (price) change of a currency. This term is one of the most important one among many in Forex currency trading, and should be properly understood by any new Forex trader.
Since transactions in Forex involve very large sums of currency and Forex spreads are usually very small, currency pairs are quoted to the fourth decimal place to be accurate. This is what is known as a Pip, or the smallest change of a currency pair. Take for example the currency pair of USD/EUR, quoted at 1.2345 and changes to 1.2346, the change in Pip would be 1. And if it changes from 1.2345 to 1.2305, the corresponding Pip change would be 40 Pips. Presently, there are 6 widely-traded currency pairs or called the majors, which are the following:
* EUR/USD, also called the ‘EURO” * GBP/USD, also called the “CABLE” * USD/CHF, also called the “SWISSIE” * USD/JPY, also called the “NINJA” * USD/CAD, also called the “LOONIE”, or “BEAVER” * AUD/USD, also called the “AUSSIE” *
Of the 6 majors, the EUR/USD is the most widely traded currency paired, with an average of 100 Pips per day.
Profits and losses are measured in Pips for any paired currency, though the Pip for a USD/JPY or US Dollar/Japanese Yen is not the same value as the Pip of a USD/EUR, or US Dollar/Euro, as it is quoted only at two decimal places; so the yen’s Pip value is .01.
If the currency pair of USD/JPY moves from 110.95 to 111.00, it has gained 5 Pips. If the USD/CAD goes from 1.0234 to 1.0224, it lost 10 Pips. So if the USD/JPY went from 77.48 to 77.53, the increase would be 5 Pips. If you trade with the majors’ like the AUD/USD and the exchange rate is at 1.9876, then 1 Pip for this trade is .0001, since it is set four decimal places.
When a trader says “30 Pips”, it means thirty units of value in a trade. You might want to check carefully the individual currencies that you plan trading on to know what their respective Pips are, as these do vary. It may be confusing at the start, and the figures might seem a little formidable at first, but once you delve into Forex currency trading regularly, it’ll soon grow on you.
Many other currencies besides the Yen have a four decimal place – those mainly paired with the USD at .0001. If you just keep in mind that a Forex Pip is one unit of the furthest listed decimal place, and that each currency pair is assigned a different value, then you’ll be well on your way to becoming a future, successful trader.