When trading in the foreign exchange market (forex), it is difficult to estimate the importance of pips. A pip, which stands for “percentage in point” or “price interest point,” represents the basic movement that a currency pair can make in the market. For most currency pairs, including for example the British Pound / US Dollar (GBP / USD), a pip is equal to 1/100 of a percentage point, or one basis point, and is counted in the fourth decimal place of the exchange rates. For currency pairs that include the Japanese yen, a pip is equal to one percent point and is counted in the second decimal place of the exchange rates.
Understanding Keys
Pips (percentage in the point) are used to calculate the prices that traders pay in the forex market. The value depends on the size of the contract you are trading. The currency used to open the account determines the value of the pip. Brokers collect the pips difference between the price the seller receives and the price the buyer pays.
Pips, Pipettes, and Spreads
The value of the pip for your trade can vary depending on the size of the contract you are trading. The difference in pips between the bid price (the price received by the seller) and the ask price (the price paid by the buyer) is called the spread. The spread is simply how your broker makes money, as most forex brokers do not collect commissions on individual trades. When you buy at the ask price (for example, 0.9714) and the seller sells at the bid price (0.9711), the broker keeps the spread (3 pips).
Pip Values for USD Accounts
The currency you use to open your trading account determines the pip value for many currency pairs. If you open an account in US dollars, the pip value for currency pairs where the US dollar is the second currency or the independent currency will be $10 for a standard contract, $1 for a mini contract, and $0.10 for a micro contract. These values will change if the value of the US dollar rises or falls significantly – by more than 10%.
Pip Values for Other Currency Accounts
If your account is funded with a currency other than US dollars, the same pip values apply when that currency is the independent currency. For example, for an account in euros, the pip value will be €10 for a standard contract, €1 for a mini contract, and €0.10 for a micro contract when the euro is the second currency in the pair. For pairs where the euro is not the independent currency, you must divide the usual pip value by the exchange rate between the euro and the independent currency.
Pip Movement in Trades
Suppose you are trading the Euro / British Pound (EUR / GBP) pair, and the bid price is 0.8881 and the ask price is 0.8884. You expect the euro to rise against the British pound, so you buy a standard contract of euros at the ask price of 0.8884. Later in the trading day, the bid price is 0.8892 and the ask price is 0.8894. You sell at the bid price of 0.8892. You made 8 pips. If your account is funded in British pounds, you made £80 from the trade.
Source: https://www.thebalancemoney.com/forex-pips-definition-what-are-pips-1344985
Leave a Reply