Understanding What Pips Are
Understanding the basic terms in trading is essential before actually participating in the live trading market. You will never get to being proficient without knowing what the terms are before you. Apart from that, the forex market is convoluted with more complicated terms and operates with a lot of abbreviations. You may get confused, so before that happens, let us define and discuss one commonly used term in the trading market: forex pips.
Definition
Forex pips or pips can be a word or an acronym in itself. Pip stands for percentage in point and it is a unit of measurement rather than a concept or a strategy in foreign exchange trading. As a measurement indicator, it tells traders the degree of change in the values in the currencies making up a pair. To illustrate, take a look at this example using the USD (US Dollar) and EUR (Euro) as a currency pair:
First Value: 1 USD /EUR = 1.0000
Second Value: USD/EUR = 1.0001
The difference can be calculated by getting the difference of the change between the first and second values which is 0.0001. This value is referred to as one pip. There are usually four decimal places to a currency pair value but unlike the rest, the Japanese Yen (JPY) stops at the second decimal point. The principle is the same, and is illustrated through this example:
First Value: 1 USD/JPY = 1.10
Second Value: 1 USD/JPY = 1.20
The difference can be referred to as ten pips.
Related Concepts
Sometime soon, you will encounter a broker who may give you a currency quote that has three or five decimal places. You might even encounter this as you make your way online. These decimal values are referred to as pipettes, fractional pips or points. These are still under forex pips only that they are quoted differently. However, measuring the difference is still the same but the pip is on the one before the last spot.
Significance
As forex pips are used as the primary measurement of how a currency pair changes in value, they are essential in terms of analyzing trends and calculating pip values. Looking at a currency pair will be useless if you, as a trader, cannot determine how much change it accrued from the last time you checked it or even the previous hour you’ve checked it. This is your primary indicator telling you if there is an uptrend or a down trend on the currency pair you are monitoring.
In every currency, there is a perceived relativity in values. Knowing what the pip is can lead you to compute for its value based on the base currency, counter currency, and exchange rate ratio. This means that you can actually determine how much a pip is valued based on the currency pair you are trading.
For computing the value of a pip, you can consult online help sites that deal with forex for the method to be used. Now that you know what a pip is, you can move on to other terms in the forex glossary.
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