The acronym “PIP” or rather pip which stands for “percentage in point” refers to the smallest measure for price movements in the Forex market. Since currency prices in Forex market are quoted in fractions, pip is the smallest decimal place that you could find in the price quotes.
We can generally divide currency pairs two groups. The first group do not include Japanese Yen. This group contains 4 decimal places. For example if the price Eure versus US Dollar is quoted 1.4523 and the price moves to 1.4524 then price has changed by 1 pip. The easy way to make calculations is to ignore the whole number and deduct the decimal sections (i.e. 4524-4523=1pip).
The second group consists of Yen as part of the quote for example US Dollar versus Japanese Yen versus. In this group the number of decimal places is limited to 2. For example if the price of USD/JPY changes from 117.12 to 117.13 then the price has risen by 1 pip. I suggest to make calculations by ignoring the decimal place (i.e. 11713-11712=1 pip).
What is the Dollar Value of a Pip?
The pip by itself has not a dollar value. That is probably one of the reasons that we use it to evaluate a trading system. It independent of your investment amount shows how good or bad your system is trading. Why it does not have a Dollar value? Because it actually represents a ratio rather than an amount. For example when we quote GBP/USD to be 2.1230 it means that every Great British Pound is equivalent to 2.1230 US Dollars at the moment. As you can see the ratio does not refer to a specific currency pair but compares two currency pairs together.
However, at the end of the day you need to see how much money you have made or lost. Therefore it is important to extract a meaningful value from pip numbers.
To make this happen I need to explain a few basic Forex concepts and definitions. Here for the sake of the argument I assume that your account currency of denomination is United State Dollar. You can easily expand the definitions to other types of accounts (for example if your account with your broker is in Euro or Australian Dollar or any other currency).
Base Currency: In a currency pair the base currency refers to the first one. For example in EUR/USD the base currency is EUR.
Quote Currency: In a currency pair the quote currency refers to the second one. For example in EUR/USD the quote currency is USD.
Cross Currency: It refers to a pair that none of the currency pairs are US Dollar. For example GBP/JPY is a cross currncy.
Trading in the Long Direction: This concept refers to buying the “base currency” in exchange of the “quote currency. For example when you go long on EUR/USD you are purchasing EUR in exchange of USD.
Trading in the Short Direction: It refers to selling the “base currency” in exchange of the “quote currency”. For example if you go short on EUR/USD then you are selling EUR in exchange of USD. In Forex you can easily trade in both long and short directions.
Lot: This word refers to the size of your forex contract. A standard lot refers to 100,000 units of the base currency. For example if you trade 1 lot of EUR/USD then you are either buying or selling 100,000 Euro in exchange of US Dollar. These days many brokers support fractions of a standard lot. The most popular fractions are mini lots or rather 10,000 units and micro lots or rather 1,000 units. For example if you trade 1 mini lot of USD/JPY then you are trading 10,000 USD in exchange of Japanese Yen.
Written by : Al Parsai President of Investatech Inc. If you wish to know how you can earn passive income through Forex visit PipBoxer Automated Trading System
Risk Warning: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.