PIPs are the unit of
measure whereby you make or lose money in the currency
market. As the PIPs increase, so does your account
value. Each PIP is worth a certain amount, depending
on the currency and whether or not you are trading
regular size lots or “mini” lots.
As this last decimal place increases or decreases, you
will make or lose money.
For example:
If the currency has
the USD as the quote, it is worth $10 per Pip. Therefore,
if the EUR/USD exchange rate moves from 1.3455 to 1.3555
the contract will increase in value by 100 pips or
$1,000.
1.3555 – 1.3455
= 100 pips x $10 per pip = $1000
The value of each pip
will depend upon the currency pair and which currency
is in the quote position. Again,
if the USD is the quote currency, then each pip is worth
$10 per pip. If the quote currency is something
other than the USD, the pip value will generally be less
than $10. The formula for non USD quotes is as
follows: If there are four decimal places as in
the USD/CHF where the rate is 1.2345, the formula would
be: 0.0001 x 100,000 / 1.2345 = $8.10/pip
If there are two decimal
places as in the USD/JPY where the rate is 115.50 the
formula would be: 0.01
x 100,000 / 115.50 = $8.65/pip
When
trading currencies you will often see a two-sided quote,
consisting of a “bid” and “ask” price.
The ‘bid’ is the price at which you can sell
the base currency (at the same time buying the counter
currency). The ‘ask’ is the price at which
you can buy the base currency (at the same time selling
the counter currency).
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