I’ve been reading about the new currency exchange program Pip Android and I commenced wondering if the newbie traders know what are those pips anyway. Forex trading pips are a vital part of forex trading that any trader must grasp. They’re the measure of changes in price, and so of profit and loss. Brokers customarily translate pips into dollars and cents for you, or into the currency that your account is held in, if it’s not US dollars. 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 utilized as a measure of change in price. Spread is also measured in pips. The pip is the littlest part of the measured price of a quoted currency.
In practice, most currencies are quoted to 4 decimal places, e.g. 1.2315. In this example 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 usually 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 misunderstanding is huge, if a pip would be worth ten times as much with some brokers than with others. So it seems likely 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 simple comparison of one trade with another so that you can guage a system. It also suggests that traders can debate their results in a foreign exchange forum without revealing the dimensions of their account or their profits in greenbacks and cents.
If a trader tells you that they made 100 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, one hundred pips profit would be $1,000 on a standard lot of $100,000 but only $10 on a $1,000 micro lot. To know the size of one pip in dollars in this situation, 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 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 grasp the pip worth in bucks.
All of this may appear confusing at first sight but anybody who starts trading will very soon understand what a pip means in practice. Currency trading pips are a helpful tool for measuring and recording price movements in forex trading.