Pips are a measure of increments of currencies. For example if EUR/USD is 0. 9551 on Monday and then is 0. 9552 on Tuesday that is a movement of one Pip.
The final decimal position of a quotation is called a Pip. Sometimes it is called a Point and is the basic measurement used in determining the amount of our loss or gain.
Since there are so many different currencies with different values, we need to have a central constant or focal point for doing our calculations and so in most cases will proceed as if are trying to calculate and convert everything based on the US Dollar. Here is what a normal calculation would look like:
To illustrate let’s use JPY at a rate of 110. 39 (unlike other currencies JPY doesn’t have as many decimal points as other currencies It has two instead of four.)
The JPY example gives us a Pip value of . 01 therefore:
USD/JPY: (the Pip value is the result of dividing 0. 01 by the rate of exchange) so .01/110. 39=0. 0000906.
USD/CHF: (Pip results from 0001/rate of exchange) so .0001/1. 4739= 0. 0000678
To ensure a correct calculation, we must add an extra step if the Dollar isn’t quoted first.
If for example if we see EUR/USD we would do our normal calculation to get the Pip which would be to divide 0.0001 by the exchange rate (EUR). Then we would calculate EUR X Exchange rate to get back to the US Dollar value.
So if EUR is 0.9779 we would multiply 0. 0001011 X 0. 9779 = 0. 0000989 and when we round it up it we would get 0. 0001.
Right now you’re probably letting out a long drawn out sigh and thinking, ‘Do I really need to be bothered with all these complicated calculations?’ and the answer is No.
Just about any broker you will do business with will work all these important details out so you won’t have to and everything is done electronically and automatically.
Still, since it’s your money, it’s a good idea for you to know how they are arriving at the figures they are presenting to you.
You are obviously interested in at least learning about Forex (Foreign Currency Exchange) trading and perhaps even getting into the market yourself and that can be a good thing.
The key to your success is knowledge. The more you learn about Pips and all that comes before and after Pips, the better prepared you will be to succeed at Foreign Currency Exchange trading.
There are many sources of information available to teach you what you need to know about Pips and Forex trading so you can avoid costly mistakes. Take your time and learn about Forex trading and may the majority of your marketing days be successful ones.