By Karen Kaminski
Pips and 'pips values' represent one of the most misunderstood concepts in Forex trading. Newbies, especially, often have trouble grasping the idea behind pips -- but, a solid understanding of pips is crucial to successful Forex investing.
If you have had trouble with pips, then today may be your lucky day. I'm going to attempt to clarify things once and for all with a brief pips tutorial.
Hopefully you are already familiar with the concept of 'basis points'. One basis point is equal to one one-hundredth of one percent, and represents the smallest increment of change measured for any financial instrument.
Take interest rates as an example. If the interest rate on your credit card rises from 10.12 percent to 10.13 percent, then it has risen by 1 basis point.
Pips are the Forex markets version of basis points. Let's say that the exchange rate for the EUR/USD pair move from 1.4465 to 1.4468. This movement represents a shift of 3 Pips, and may be good or bad depending on which currency you are holding.
Here's the catch, though. Notice that the shift took place on the 4th decimal, which is the ten-thousandths place, or 1/10,000 of a percentage point? You have a shift of one ten-thousandth instead of one one-hundredth.
The reason for this is that most currencies (with the exception of the Yen) are quoted out to four decimal places. This means you get to take advantage of even the most minute shifts as you trade on high volume.
In order to calculate Pips for the common, four decimal currency pairs, you must divide the value of 1 Pip by the exchange rate:
1 Pip = 1/10000th / exchange rate
Now, what happens when you are dealing with the Japanese Yen? In this currency pair, we find an exception to the rule because the Yen is quote out only to the hundreds place, or 1/100.
For the USD/JPY pair (or vice versus), your formula would be:
1 Pip = 1/100th / exchange rate
Now that you know how to calculate Pips for any currency pair, you must look at what an actual Pip is worth to you in real dollar terms. This value is known as "pips value'. In order to do this, we must bring 'lot size' into the equation.
If you purchase a standard lot of 100,000 pairs of EUR/USD at 1.4465. , your formula will be as follows:
Pip Value = (0.0001 / 1.4465) x 100,000 = 6.91
So, a pip at this exchange rate is worth 6.91 Euro. Do not look for exact numbers here. What you need to pay attention to is the fact that '6.91' represents the average gain or loss per change in pips.
In other words, a fluctuation of 2 pip from 1.4465 to 1.4467 isn't going to raise your profit or loss by a full Euro or more. Try doing the calculation for a 2 pip rise, and you'll see that your pips value goes up only to 6.192.
I recommend getting comfortable with these basic calculations first, and then moving on to the calculations of actual profit and loss, which will require you to factor in bid price and ask price.
Also, remember that your online broker usually calculates pip and pips values for you, and you do not have to know how to do the math. It's just good business to be able to do it yourself.
Karen Kaminski is an information publisher and marketer with a passion for creating unique quality content that people can benefit from. Learn anything you need to know about Forex by visiting her site.
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Article Source: http://EzineArticles.com/?expert=Karen_Kaminski
Wednesday, March 12, 2008
Pip in Forex Trading – The Final Hit
By Altaf Sahibzada
In general terminology the abbreviation “pip” may refer to many things like Protective Industrial Products, Picture-in-Picture, Personal Identity Provider, Partners in Protection, Preferred Internet Provider, Performance Index Paper etc.
In currency trading “pip” stands for “percentage in point”. This is the smallest increment of change in forex trade. It is the smallest number in quotation of a currency.
In foreign exchange market, rates are quoted to the fourth decimal point. For example, if the price of a burger in the market is $1.22, in forex market the same burger will be quoted as 1.2200. Under this example, the 4th decimal point will constitute one pip and normally equals 1/100th of 1%.
The above is the general rule. Exception to this is the quotation in USD/JPY which is only up to 2 decimal points. This is because Japanese Yen has not been revalued since Second World War. Thus in case of Yen, the quotation is only up to 1/100th of yen as against 1/1000th with other major currencies.
All other currencies in relation to Yen will be quoted up to 2 decimal points. The usual pairs will be AUDJPY, CADJPY, CHFJPY, EURJPY, GBPJPY etc.
Other factors that go in the understanding of a pip are trading size, extent of leverage and rate of a currency pair. In case of USD, with a leverage of 1:100 and trading volume of one lot, one pip will have a value of $10.
The above will be the minimum incremental value by which USD will fluctuate. Thus, if there is a one pip change, that means one has gained or lost $10.
One pip value for one lot in USD will be equivalent to $10 in case of all currency pairs not involving JPY. Where JPY is the other currency in a pair, one point value will be equivalent to $1000 / USDJPY rate.
Closely associated with pips is the “spread”. This is the difference between bid price at which a forex broker is willing to buy the first currency of a pair and the offer or sell price at which he is willing to sell the first currency of a pair. The difference between bid and ask prices is the spread.
If EUR/USD is quoted as 1.4205/1.4207, the spread will be equivalent to EUR 0.0002 or 2 pips. The size of a spread depends upon the popularity of a currency pair. The more popular a pair, smaller the spread and vice versa.
Pip spread may be better for major players which trade in large quantities as compared to retail or individual traders. Spot prices on EUR/USD are usually no more than 3 pips wide (0.0003). With increased competition, pip spreads have shrunk on major pairs to as little as 1 to 2 pips.
Please Follow This Link For more information, Free Forex Guide and Free Sign Up
Article Source: http://EzineArticles.com/?expert=Altaf_Sahibzada
In general terminology the abbreviation “pip” may refer to many things like Protective Industrial Products, Picture-in-Picture, Personal Identity Provider, Partners in Protection, Preferred Internet Provider, Performance Index Paper etc.
In currency trading “pip” stands for “percentage in point”. This is the smallest increment of change in forex trade. It is the smallest number in quotation of a currency.
In foreign exchange market, rates are quoted to the fourth decimal point. For example, if the price of a burger in the market is $1.22, in forex market the same burger will be quoted as 1.2200. Under this example, the 4th decimal point will constitute one pip and normally equals 1/100th of 1%.
The above is the general rule. Exception to this is the quotation in USD/JPY which is only up to 2 decimal points. This is because Japanese Yen has not been revalued since Second World War. Thus in case of Yen, the quotation is only up to 1/100th of yen as against 1/1000th with other major currencies.
All other currencies in relation to Yen will be quoted up to 2 decimal points. The usual pairs will be AUDJPY, CADJPY, CHFJPY, EURJPY, GBPJPY etc.
Other factors that go in the understanding of a pip are trading size, extent of leverage and rate of a currency pair. In case of USD, with a leverage of 1:100 and trading volume of one lot, one pip will have a value of $10.
The above will be the minimum incremental value by which USD will fluctuate. Thus, if there is a one pip change, that means one has gained or lost $10.
One pip value for one lot in USD will be equivalent to $10 in case of all currency pairs not involving JPY. Where JPY is the other currency in a pair, one point value will be equivalent to $1000 / USDJPY rate.
Closely associated with pips is the “spread”. This is the difference between bid price at which a forex broker is willing to buy the first currency of a pair and the offer or sell price at which he is willing to sell the first currency of a pair. The difference between bid and ask prices is the spread.
If EUR/USD is quoted as 1.4205/1.4207, the spread will be equivalent to EUR 0.0002 or 2 pips. The size of a spread depends upon the popularity of a currency pair. The more popular a pair, smaller the spread and vice versa.
Pip spread may be better for major players which trade in large quantities as compared to retail or individual traders. Spot prices on EUR/USD are usually no more than 3 pips wide (0.0003). With increased competition, pip spreads have shrunk on major pairs to as little as 1 to 2 pips.
Please Follow This Link For more information, Free Forex Guide and Free Sign Up
Article Source: http://EzineArticles.com/?expert=Altaf_Sahibzada
Thursday, January 31, 2008
Forex Pips - What Exactly Are They?
By Sandy Robinson, J.D.
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.Copyright 2007
If you are ready to change your future by stepping into the exciting world of trading FOREX, go to http://www.winningtradersassociation.com for more information.
Author Sandy Robinson, J.D. is part of the Winning Traders Association, an educational organization founded by John Beiler, President.
The organization consists of a network of committed trainers and motivated traders willing to provide support to those interested in trading foreign exchange. Many of the members work from home.
Article Source: http://EzineArticles.com/?expert=Sandy_Robinson,_J.D.
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.Copyright 2007
If you are ready to change your future by stepping into the exciting world of trading FOREX, go to http://www.winningtradersassociation.com for more information.
Author Sandy Robinson, J.D. is part of the Winning Traders Association, an educational organization founded by John Beiler, President.
The organization consists of a network of committed trainers and motivated traders willing to provide support to those interested in trading foreign exchange. Many of the members work from home.
Article Source: http://EzineArticles.com/?expert=Sandy_Robinson,_J.D.
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