Forex Pips – What Exactly Are They?
All traders in the foreign exchange (FOREX ) market are seeking to find as many of these sometimes elusive characters as possible. They are called pips. What is a pip and what role does it play in the FOREX market? One thing is sure–you can make money when you gain pips.
In the R&B genre of yesteryear, many came to know and love the music of Gladys Knight and the cool-stepping Pips, her background vocals. As a personal injury attorney in a prior professional life, I associated the term, PIP (acronym for Personal Injury Protection) with a type of insurance coverage which usually meant more money for my clients, and yes, for me also. As the music of Gladys and her group slowly fades into the musical sunset and PIP insurance coverage persists in the legal realm, the term pip rings louder and louder in the investment world. You may be surprised, however, by the number of definitions or references available for the term in online resources such as Wikipedia.
What Is A Pip?
In FOREX trading, a pip is the unit of measurement for the smallest change in the price of a currency or currency pair. Compare this term to the use of the unit of measurement in the stock market referred to as a point. Charts that are used for trading the FOREX usually clearly reflect the various price levels of a currency. With each price levels achieved, it should be fairly easy to mathematically determine the amount of movement in a particular currency as expressed in pips. Many online platforms provided by FOREX brokers display a feature which automatically calculates the number of pips gained or lost in the position taken by the trader.
How Much Is It Worth?
Generally speaking, as to certain major currency pairs such as the EUR/USD (Euro/U.S.Dollar), if a trader commits one standard lot (equal to 100,000 units of the currency traded) to the trade, a movement of one pip in the trader's favor will yield a profit of $10. If a mini-lot (equal to 10,000 units of the currency traded) is used instead, then one pip will have a value of $1. A micro-lot and its corresponding pip value would be one-tenth that of a mini-lot. Stated another way, a trader can predetermine the value of the pip, and consequently the profit or loss resulting from the trade, by changing the number of lots used in the trade. The greater the number of lots used, the greater the potential profit or loss. The converse is also true.
The monetary value of a pip depends not on the number of lots traded but also on the type of currency traded. If the currency pair used is the USD/JPY (U.S. Dollar/Japanese Yen), the pip value will be less than $10 for a 100,000 lot trade, based on the current exchange rates. Similarly, other currency pairs may have differences in value for the pip based on the same standard lot size.
What Is A Pip Spread?
One final observation should be noted here. Most FOREX brokers quote their spreads in terms of pips. The spread is the difference between the bid and the ask price of a currency pair. It is also the amount that is paid to the broker for facilitating the trade. Therefore, the lower the spread in terms of pips, the less the broker gets paid and the more profits the trader gets to keep.
Sandy Robinson, J.D.