In the realm of foreign exchange trading, or forex trading, the significance of pip values cannot be overstated. A "price interest point" or "percentage in point," or "pip," denotes the minimal fluctuation in value that a currency pair might experience in the market.
Pips are tallied in price quotes after the decimal, and for the majority of currency pairs—such as the British pound/U.S. dollar (GBP/USD)—one pip is equivalent to 1/100 of a percentage point, or one basis point. A pip is one percentage point, and in price quotes, pip values come in second place after decimals for currency pairs including the Japanese yen.
Exchange of currencies is necessary to support global trade and business. Such trades take place on the forex market, along with wagers placed by speculators looking to profit from changes in currency pair prices. The rates that players in the forex market pay while executing currency trades are determined using pip values.
Pips, Pipettes, and Spreads
When trading, the value of the pip values can change based on your lot size. (A micro lot is 1,000 units, a mini lot is 10,000 units, and a standard lot is 100,000 units of a currency.)
The spread is the number of pip differences between the ask price, which is the price the buyer pays, and the bid price, which is the amount the seller receives. Since most forex brokers do not charge commissions on individual trades, your broker essentially earns money from the spread. The broker keeps the spread (3 pips) when you purchase at the ask price (let's say, 0.9714) and a seller is selling at the bid price (0.9711).
After a pip, several forex brokers quote rates to one decimal point. These pips are divided into sections known as pipettes, which give more latitude in terms of spreads and prices.
U.S. Dollar Account Pip Values
The pip value of many currency pairings is determined by the currency you choose to start your forex trading account. The pip value for currency pairs in which the US dollar is the second, or quote, currency will be $10 for a regular lot, $1 for a mini lot, and $0.10 for a micro lot if you setup an account denominated in US dollars. Only a big increase or decrease in the value of the US dollar of more than 10% would result in those pip values changing.
You would divide the typical pip value by the exchange rate between the dollar and the quote currency if your account is financed in US dollars and the dollar is not the quote currency. For instance, the pip value for a regular lot is $7.51 ($10 / 1.3319) if the U.S. dollar/Canadian dollar (USD/CAD) exchange rate is 1.33119.
Values of Pips for Additional Account Currencies
The same pip value amounts apply if the currency used to finance your account is not the US dollar and that currency is used as the quote currency. For instance, if the euro is the second currency in the pair, the pip value for an account denominated in euros will be 10 euros for a regular lot, 1 euro for a mini lot, and 0.10 euro for a micro lot. You would split the typical pip value by the exchange rate between the euro and the quote currency for pairs in which the euro is not the quote currency.
Trade Pip Movements
Assume that the bid price is 0.8881 and the ask price is 0.8884 when trading the euro against the British pound (EUR/GBP). You purchase a regular lot of euros at the ask price of 0.8884 because you anticipate that the euro will appreciate versus the pound. The ask price is 0.8894 and the bid price is 0.8892 later in the trading day. At the 0.8892 bid price, you sell. Eight pip gains were made. You made 80 pounds on the trade if pounds are the method used to fund your account.
Disclaimer
Derivative investments involve significant risks that may result in the loss of your invested capital. You are advised to carefully read and study the legality of the company, products, and trading rules before deciding to invest your money. Be responsible and accountable in your trading.
RISK WARNING IN TRADING
Transactions via margin involve leverage mechanisms, have high risks, and may not be suitable for all investors. THERE IS NO GUARANTEE OF PROFIT on your investment, so be cautious of those who promise profits in trading. It's recommended not to use funds if you're not ready to incur losses. Before deciding to trade, make sure you understand the risks involved and also consider your experience.