Lesson 13 – Understanding Pips for Forex Traders
What are pips?
When it comes to forex markets, you’ll likely have come across the terms “pip” (or also called “point”).
It is important that you understand what a pip is as it is the most basic measurement that you’ll use in measuring your forex trades in.
A “pip” is short for “point in percentage” and is the smallest unit amount by which a currency pair quote can change.
It is because of this, a pip is normally the last decimal place displayed in a currency pair quote.
So let’s say for example in US Dollar related currency pairs, it is the fourth and last decimal point as shown below.
IMAGE SHOWING $0.0001
Usually, most major currency pairs are quoted to the fourth decimal point, except when the Japanese Yen is the quote currency.
In this case, it is only quoted to two decimal places, where the last decimal place is the pip as seen below.
IMAGE SHOWING YEN0.01
Pips and their effects
Let’s observe how changes in the market make pips move and what that means.
One pip move
So, if the value of the EUR increases against the USD by one pip, then you would see a change in the quote like this
IMAGE SHOWING 1.1303-1.1304
In this case, the value of the EUR rose by 1 pip against the USD. If we closed a trade on this movement (assuming no fees), we would make a profit of 1 pip.
100 pip move
So, if instead the value of the EUR increases against the USD by 100 pips, then you would see a change in the quote like this
IMAGE SHOWING 1.1303-1.1403
How much do pips usually move on average in markets?
This is something that really varies a lot depending on the market and stability surrounding it (e.g due to economic news or political developments). But, forex markets usually tend move between 80 to 100 pips per day.
This might not seem like a lot, and it actually isn’t, but using leverage and margin trading, you can make quite substantial profits from such small movements in the market. But we’ll cover those topics in later lessons in this chapter.
Sometimes, in rare cases, you might see on a trading platform that the EUR/USD is trading to 5 decimal places or that a YEN quote is displaying 3 decimal places. This isn’t a cause for concern.
Generally speaking, if you see 5 decimal places, then the 4th decimal is the pip. If you see 3 decimal places, then the 2nd is the pip.
In these cases, the 5th and 3rd decimal places are called pipettes and are not really important at all as they are so small and rarely displayed. Usually, not much attention is paid to them.