During your trading experience, you
might have heard of this term numerous times. Whether you actually know what it
means or not, we’ll now be providing you with a simple definition of the term.
What is a Pip?
The word pip is an acronym. It means “percentage in
point” even though it’s also sometimes called the price interest point.
A pip is a rather small measure of change in a currency pair used
in the forex market. The measurement can be done in terms of the quote or in
terms of the underlying currency. Most pips have the value of 0.0001 price change.
Such as the EUR/USD currency pair price possibly changing from 1.5067 to
1.5068, this means that there is a one-pip movement.
But there are also exceptions to this rule, having the price
quoted at only 2 decimal places, not 4. In such cases, a pip is at 0.01 instead
of 0.0001. An example of this will be the Japanese yen. If the USD/JPY currency
pair increases from 108.92 to 108.93 then there is a one-pip change as well.
To put it simply, a pip is a unit of measurement which is
used to express the change in value between two currencies, the smallest
movement that a currency pair can make. This is usually found at the last
decimal place of a quotation.
What is the value of a Pip?
This will actually depend on your lot size when you’re
trading. You should also know that the difference between the bid and ask is
called the spread. A spread is the way your forex broker makes money since
most brokers don’t even collect any official commission.
The position of your pips in trading can determine the situation
you’re trade is currently in. A trade with positive pips means that you’re
making a profit while a negative pip usually means that your trade has sunk.
Most pip values are determined by the base value of your
trading account. Such as when trading a mini lot (10k units of currency), each
pip is worth roughly one unit of the currency that your account is denominated
in.
Opening a USD-denominated account followed by currency pairs
where the US dollar is the second or quote currency will always put the value
of your pip on a mini lot at $1. The only time you’ll see any change is if or
when the greenback’s value changes significantly by more than 10 percent wither
direction, also if the US dollar is not part of the pair (e.g. EUR/GBP,
GBP/JPY, EUR/CHF, etc.) or is the base currency.
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