Forex Investment: What is a Pip in Forex Trading?

understanding-pip

A forex investment fund gives way to the process of investing in currency. It involves you buying and selling particular types of currency at the same time. Also known as the foreign exchange market, a forex investment is essentially a hub for investors – such as yourself – to further diversify their portfolios.

And while forex investing brings with it many benefits like convenient hours for trading, a large and global market, and low transaction costs, it also has a myriad of concepts that can and do cause confusion among would-be investors.

And one of these notions that are important for you to understand – and that we’ll be discussing in this article – is the concept of a pip.

At CWS Capital, our aim is to help lift the cloudy veil of forex investing so you’ll have a better idea if this is the right investment vehicle to help you achieve your goals. Keep reading to learn more about the pip and why it’s important for forex trading.

What is a Pip?

The measurement of a unit that communicates the alteration in the value of two currencies is what is known as a “pip.” If EUR/USD shifts from 1.1050 to 1.1051, then that .0001 USD difference or increase in value is a single pip.

Typically, a pip is the final decimal place of the quote of a price.

The majority of pairs go out to 4 decimal places. However, exceptions exist, as in the case with the Japanese yen pairs (which will go out to two decimal places).

For instance, for EUR/USD, it is 0.0001, but for USD/JPY, it is 0.01.

What is a Pipette?

Certain forex brokers may quote currency pairs that go beyond the traditional “4 and 2” decimal places, up to “5 and 3”. These brokers are quoting what are known as ‘points’, ‘pipettes’ or fractional pips.

A fractional pip equates to one-tenth of a pip.

For example, if GBP/USD shifts from 1.30542 up to 1.30543, then that .00001 USD move upward is a single pipette.

Finding the Pip Value in Your Trading Account’s Currency

One question to consider asking when determining the value of the pip is, “What is the value of the pip in regard to my trading account’s currency?”

At the end of the day, it is an international market and not everyone’s account is denominated in the exact same currency.

This entails that the value of the pip will need to be converted into whatever currency your account is trading in.

As such, this estimation is most likely the most straightforward of all; multiply/divide the “found pip value” with the exchange rate your account is trading in, as well as the currency in question.

Let’s translate the found pip value of .813 GBP into the USD pip value by utilizing GBP/USD at 1.5590 as the exchange rate ratio.

Now, if the currency in question that you are translating to is the exchange rate counter currency, all that’s required of you is to divide the “found pip value” by the correlating exchange rate ratio.

Final Thoughts

Being able to understand forex trading is simply a matter of grasping the basics. And one of the fundamentals is the comprehension of the pip: what it means and how it relates to your investing strategy. At CWS Capital, our objective is to educate you so you have a full understanding of forex trading and investing.

Consequently, if you’re interested in learning more or would like to begin your forex investment journey – contact us today for additional information and to see if you qualify.