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Interpreting the Forex Pip

Filed under: Uncategorized — emitaliablog
Posted on October 29, 2010 @ 2:03 pm
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Analyzing and Demystifying the Forex Pip

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If you are examining forex currency trading, you are certain to run into traders talking about forex pips. This is how your gains and losses will be determined, so it pays to conceive the concept of pips very well.

The change of bid and ask price, usually referred to as spread is measured by pips as well. Hence pip is an essential constituent in forex.

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The word is an acronym of percentage in point (or also known as, price interest point). In forex terms, it is the lowest measure of value correction.

Using it permits one to quantify price change in percentage as against to monetary terms.

Why use it though? This so for the following reason. Though the forex market is a global one, there is a lack of a global currency.

The US dollar may be the most regularly traded currency but it is not used in all trades. When other currencies or cross rates are utilized like JPY/AUD or other pairs other than the USD are traded, it would be ineffectual to use the USD as a measure.

Instead, we need something that is a small percentage of the value of the corresponding currencies we are handling. The suggestion being that the pip value in monetary measure is varied relative to the currency.

Normally, four decimal points are used to quote currencies. For instance you would see the bid price for EUR/USD quoted at 1.3642 and ask price 1.3644. The bid and ask variation aka the spread is .0002 or 2 pips. Therefore, the pip would be 0.01% of the lot.

Thus given a lot amplitude of $100,000, a single pip’s consideration would be $10. For a lot quantity of $10,000, one pip would be estimated at $1.

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The earlier mentioned is the pip value when quote currency is the USD. In cases where the quote currency is different 1 pip would generally be 10 units in that unit such as 10 pounds or 10 euros. Should the lot size be 10,000 units, pip would be 1 currency unit meaning 1 pound or 1 euro.

A notable exception is the JPY due to its very less unit value relative to other units. Due to this, the second decimal point is used to quote yen.

For example, a price could be USD/JPY 110.15. This means that 1 pip would be 0.01 or 1 percent in yen, not in dollars. So the pip value is JPY 1000 which at that price would be valued at US $11.015.

It would can be difficult to understand at first. Because of this, newbies are counseled to stick with a single currency pair at the start.

Once you trade routinely with a single currency pair, the association of the pip to real life losses and gains will become ostensible. The value of one pip in the dollar or your home currency shall become basic knowledge to you.

Once you trade with various other currency pairs, the pips will be of different values. You could get snarled about the relative value and risk more than you planned and end up losing more or making less than what you had contemplated.

So it’s absolutely better to deal with just one currency at the beginning and wait until you have set up a concrete foundation in forex trade nuances and pip values of different currencies.

Note: Currency trading is speculative, can result in material losses, and is not suited for everybody.

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