Pip – The smallest Currency value

by admin on July 5, 2011 2:52 pm

CandlesticksThis basic guide will help you to understand a pip, as used by forex traders. To them, everything principally revolves around a pip in forex trading. Some good examples are the everyday quotes that you hear which include “I’m up 15 pips for the day” or “I made a 150 pip profit on my last trade”.

So, the big question is what exactly is a pip? And the uncomplicated answer is a pip is simply the short form of ‘percentage in point’. You may often hear forex traders commonly refer to them as just points. When you put it plainly, it is the most negligible unit of the price for any currency. Primarily, it forms the very last decimal point shown in currency pairs or exchange rates.

For majority of currencies, its pip is 0.0001. More simply viewed, suppose you buy USD/CHF at 1.2475 and proceed to sell it at 1.2489, you will have a 14 pips gain. A common exception to the rule is USD/JPY. For this exchange rate there are just 2 decimal places. Hence, in this special case the pip equals only 0.01. The prime reason, why a pip is so significant, is the fact that pips are the overall basis for calculation of all profits or losses incurred in all forex trade deals.

Pip Value

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So, with an abundant range of diverse currency pairs, which traders can deal in, as well as constantly fluctuating prices, how would you find out the real value of any pip? Well, the calculation is relatively simple. In the case of currency pairs that base USD as the currency, simply divide the pip, which is generally 0.0001, with the ongoing exchange rate to obtain the pip value. It is much simpler with currency pairs where USD is treated as the quote currency. Pip value always remains one pip, i.e. 0.0001, for instance.

So in the above example, should exchange rate for the USD/CHF be 1.2489, this method would result in: 0.0001 / 1.2489 = 0.0000800704. Apparently, this is a very insignificant number. You should nevertheless always keep in mind that, as far as forex trading is concerned, you can leverage reasonably small amounts of your investments to move relatively much larger quantities of actual currency in forex trading. Plainly put, you can make use of leverage to generate huge profits off this apparently tiny number.

To give you an example, suppose your broker gives you the option to trade forex with a leverage of say 100:1. This would imply that to purchase a lot of $100,000, which is a standard lot, you would need to invest $1,000 only, of your own money. Keeping this in mind, you should be able to easily visualize to what effect trading in much larger lots can affect its pip value, and thus your eventual profit or loss.

Should you be trading a small sum of $1,000 only in currency, you would calculate the pip value as follows: 0.0000800704 X 1000 = $0.08 per pip. As such, the price would need to immensely rise by momentous pips before you can even start to make a reasonable profit at the given rate. In actual terms, the 14 pips would only make a minor profit of $1.12 for you.

Whereas, using the leverage to actually buy a big lot of $100,000 as your base, overall increase in your profits would work out as: 0.0000800704 X 100,000 = $8.01 per pip. This comes to a much higher profit when computed to $112.14. It should now get you talking real business.

Some other pip value calculations

To calculate the value of a pip in currency terms, multiply each pip with its lot value.

EURUSD pip = 0.0001 X 100,000 = $10.00

EURUSD pip = 0.0001 X 10,000 = $1.00

USDCHF pip = 0.0001 X 100,000 = SFr 10.00

USDCHF pip = 0.0001 X 10,000 = SFr 1.00

To convert a pip to its base currency, divide it by the exchange rate.

Say EURUSD exchange rate = 1.4750 = $10.00 / 1.4750 = EUR 6.78

Say USDCHF exchange rate = 1.1015 = $10.00 / 1.1015 = $9.08

JPY also works on the same principal, but with a second decimal place.

If you happen to be attached to forex trading, for even a minimal period of time, you are bound to have heard a lot about this apprehension.

Can you really depend on forex robots? Well, this is more of a two-sided issue. If you entirely expect your robot to provide you trades, as well as tell you when to go or out of the market, depending on B.S. algorithm, simply forget all about it.

Alternatively, if you are a trader with an efficient system, you simply need an automated method to base your system on. Yes, it is quite possible in this case to automate your forex trading, as long as you are perfectly certain that you already have a truly profitable system in place.

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Risk Disclaimer

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

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