Forex Basics - PIP Definition and More

Forex Basic

What do you understand by the term pip? Definition for the term may confuse you if you are new to the forex market. Here is everything you need to know about pips, what they are and how they are important to the forex market.

#1- Definition-a pip is essentially the smallest price unit that is traded with respect to a currency. It is actually a shortened form of 'percentage in points'. As most currencies are usually traded up to four decimal points, a pip would indicate a value of.0001 i.e. one hundredths of a cent! Sounds incredibly tiny? Well, not really! You see, a standard trade in the forex market would translate into a value of $100000. So, a pip here would be equal to $10! Doesn't sound that tiny now, does it?

#2-The Spread- currency trading always comes in pairs. So, if you are buying a currency, you are naturally selling another. In actively traded pairs, the spread may be as little as 2 pips.

#3-The Pips spread- this is very important to you as a trader. In a forex market, there are no broker fees to be paid. However, the difference in spread is the total cost for the transaction. You should always take this into consideration when you are estimating profits.

#4- The Factors Affecting the Pip Spread- the currencies that are active on the market have a lower pip spread. However, you should remember that these pip spreads are not fixed. They may fluctuate with changes in the market. It is a better idea to verify the spread offered by your broker before you go for a trade.

#5-The Pip Value- as a forex trader, you understand that the currencies are fluctuating all the time. So how do you decide the pip value? If a USD is your base currency, divide a pip with the exchange rate and that's your pip value! If the USD is the quote currency, your task is easy! Your value is 1 pip itself!

Your profits in the forex market are calculated through a pip- definitions are only the first step in understanding them!

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