Understanding Currency Trading Pips

Any new trader in forex will come across the term currency trading pips. Successful foreign exchange currency trading depends in part on how well you understand the terms used in trade. The term pip means percentage in point or the price interest point. In currency trading the profits and losses are quoted in currency trading pips. The currency trading pips represent the smallest price value increment that any currency can make. These currency trading pips helps the trader in determining the rise and fall of foreign exchange currency values. This is shown in percentage. Here the trader has to do some math to arrive at the values of currency trading pips.

It is also notable that forex trading spreads have their measure in currency trading pips. The currency trading pips are used because of the absence of a universal currency that can be used in indicating the values of foreign exchange. The US dollar is traded widely around the world but it cannot be used because it does not feature in some of the forex trading transactions. An example is when a trader is trading with EUR/JPY. Such a trader cannot measure their profits or losses in terms of US dollars as it is not used in this transaction. Thus forex traders use currency trading pips which are a minute percentage of forex currencies rate. The value of currency trading pips will change with each currency used in a given transaction.

There exist two types of currency trading pips. The first type known as the static pip and the second one is the variable pip value. A static pip value occurs when the major world currencies excluding the US dollar are traded as base currency. On the other hand the variable pip value occurs when the US dollar is used as the quote currency in a given transaction. The determination of currency trading pips involves computation of values that are based on current exchange rate of a specific currency. This value of the pip is dependent on the trade contract or trade lot. As a forex trader it is good to have knowledge of the two types of pips.

Most of the world’s major currencies have their quotation to 4 decimal places excluding the Japanese yen. A good example can be given by a forex transaction where we have a bid price for GBP/USD with a quotation of 1.5624 and an ask price of 1.5629. The spread here is 0.0005 better represented as 5 pips. A pip is normally 0.01% of a given lot. Consequently, a lot size of $200,000 will have a pip with a value of $20. It is important to note that the value of currency trading pips here is arrived at when the US dollar is the quote trade currency. Where the quote currency is not the US dollar a currency trading pip is usually 10 units of the given currency.

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