What is a forex pip? This is a question that most beginners ask. All forex traders need to be familiar with the pip, which is the unit of measure for price movements in the currency market. Since they measure prices, they are also a measure of the profit and loss of your trades.
Your account will normally show profit or loss in terms of dollars and cents or in your own currency. The broker’s software automatically calculates that.
However, if you want to compare two trades that happened at different times or in different currency pairs, the profit in pips can tell you more than the profit in dollars which would be dependent on the currency and the rate of exchange.
One forex pip is the smallest measured amount of the price of a quoted currency. Most pairs are quoted to four decimal places. An example might be EUR/USD at 1.3712. One pip is 0.0001 units of the quote currency which is the dollar, so here it is 0.01 of a cent. If you open a trade at this price and it moves to 1.3717, you have made 5 pips profit, not accounting for spread.
Spread is the way that most brokers make their money and it also measured in pips. On EUR/USD a broker’s spread might be 2 pips. So taking our example again, the price of 1.3712 would be the bid price.
If you buy at that price and the bid price increases to 1.3717, the 2 pip spread would mean that the ask price, or price that you get when you sell, would be 1.3715. So in fact you would only make 3 pips and the broker would keep the other 2 pips.
In pairs where the Japanese yen is the quote currency, the price is usually only quoted to 2 decimal places. That is because the yen is worth a lot less than the other major currencies. For example the price of USD/JPY might be 90.62. One pip is 0.01 of a yen.
It is useful to keep your trading records in terms of pips as well as noting the actual money that you make. This allows you to compare trades where your position size was different. You can then consider whether your system might work better if you altered the position size in some situations.
The forex pip is also a convenient way to discuss your trading successes with other traders in meaningful terms and without revealing any details of your financial situation.
If I told you that I made $100 dollars on a trade yesterday, you would learn something about how much money I was making, but without knowing my position size you would know what kind of a price movement was involved. I
f I tell you that I made 100 pips, on the other hand, you would know that I found a good trade and I didn’t have to reveal anything that would interest the IRS.
When you begin trading, you will soon become familiar with any part of this that seems confusing right now. It does not take long to become accustomed to using the forex pip in practice.
