Forex Trading Pips

Once you enter the world of Forex trading you are likely to come across a lot of technical language. Although nowadays it is possible to make a good profit on the Forex marketplace without having any or very little knowledge of the subject, it is still recommended that you learn the basics to help you should unexpected situations arise. One term that you are guaranteed to see on a daily basis when trading is Forex trading pips.

Forex trading pips is the term used for the pips that come with any profit and losses that you make whilst trading on the Foreign Exchange. Because profit and loss is measured in pips, it is important to know exactly what it means to you. A pip, sometimes known as a point, is an acronym of “Percentage In Point” or “Price Interest Point”. In essence, Forex trading pips are the smallest value that any currency can have. No matter which currency is traded on the Foreign Exchange, it is all measured in terms of pips. It is an alternative way of determining the rise and fall of Forex currency values in terms of percentages, instead of using dollars and cents for measurement. You may also be familiar with what a Forex spread is and you will see that these spreads are also measured by way of pips.

So why is it necessary to use pips as a measurement on the Forex marketplace? Well, Forex trading pips are a universal way of measuring foreign currency values. It would be pretty inefficient to just use the USD (US Dollar) as a measurement as the USD does not feature in all of the currency pairs that are traded and available on the Foreign Exchange. Therefore it would be nonsensical to apply dollars as a way of calculating profit and loss on any other currency except the USD.

In the majority of cases and bar the Japanese Yen (JPY), all currencies are quoted to a fourth decimal place. As an example, if the bid price of the currency paid EUR/USD was quoted as 1.2641 and the ask price was 1.2645, then the spread is equal to 4 pips (0.0004). If you are looking at it from a percentage point of view, then one pip is equal to 0.01% of a lot. This means that if the lot size was $200,000, then 1 pip would be equal to $20. If you were trading with a different currency, for example the Great British Pound (GBP), then 1 pip would equal 20 units of that particular currency (£20 if the lot size is £200,000).

As for the Japanese Yen (JPY), it is always quoted to two decimal places on the Foreign Exchange due to the fact that it has a smaller unit value than other currencies. Essentially this means that against other currencies, the Japanese Yen is 0.01, not 0.0001.

This may seem like an awful lot of information to get your head around and may still seem very confusing at the moment. The best way for a novice to gain knowledge of Forex trading pips is to actually start trading. It is recommended that you start with only one chosen currency pair when you trade. This way you can learn more about how pips work in relation to that particular currency pair and then move on to other pairs when you feel more confident that you understand what it all means!