Interpreting the Foreign Exchange Pip
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Conceiving the Forex Pip
Any research of forex business will encounter the term forex pip, sooner rather than later. This is how your gains and losses will be determined, so it pays to conceive the concept of pips very well.
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The variation of bid and ask price, generally referred to as spread is measured by pips as well. Undoubtedly the little forex pip cannot be disregarded.
Pip is really short for percentage in point aka price interest point. In forex terms, it is the least measure of value correction.
It admits us to measure a rise or fall in currency values in percentage terms rather than in dollars and cents.
Pips are a significant term in forex. Just for this. In the currency market there is no universal currency in which to express values.
Even the US dollar, well known as it may be, is not always part of forex deals. If you are trading cross rates, i.e. two other currencies such as INR/EUR EUR/GBP or any other combo that does not involve USD, it would not have any point at all to denote your gains and losses in terms of US dollars.
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So a representation that is rather small compared to currency value is what the situation gives rise to. It follows then that pip value in monetary terms will alter depending on the currency in question.
Actually, four decimal points are used to quote currencies. As a case in point you would see the bid price for EUR/USD quoted at 1.3642 and ask price 1.3644. The divergence (the spread) is 0.0002 or 2 pips. Therefore, the pip would be 0.01% of the lot.
Consequently, one pip would be worth $10 for a $100,000 lot size. On the other hand, it would be $1 for lot sizes of $10,000
That is the rate of pips when the USD is the quote currency, i.e. XXX/USD. But when the quote currency is distinct, one pip is generally 10 units of that currency (e.g. 10 euros or 10 pounds). Should the lot size be 10,000 units, pip would be 1 currency unit meaning 1 pound or 1 euro.
A special case is the Japanese yen which has a much lower unit value than almost all currencies (you get much more of yen to the dollar). Due to this, the second decimal point is used to quote yen.
You would see a price USD/JPY 110.15. In this situation one pip is 0.01 or 1% albeit in yen, not dollars. price.
This calculation could be a source of confusion at the beginning. So it is better for starters to trade steadily with just one currency pair.
If you are trading one pair steadily every day you will soon get a hang of how much a pip means in connection with your actual gains and losses in your account. You will find how much one pip is equal to in dollars or in your own currency.
Once you trade with many other currency pairs, the pips will be of distinct values. It may cause confusion and result in assigning wrong values to trades that may either mean risking more than planned of or getting a lot less money than predicted.
So it’s absolutely better to exchange with just one currency at the initial stage and wait until you have set up a concrete foundation in forex trade matters and pip values of different currencies.
Note: Currency investing is speculative, can result in considerable losses, and is not suited for everybody.
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