Pips - Forex Units

The last post was about the spread, which is measured in units called pips. A pip is the smallest unit of change in forex rates. It also appears on the stock market. The smallest unit of change there is one cent, so a pip on the stock market is one cent. Most forex trading systems and stock market auto-traders use pips, so it's a term you should know.

In the forex market, exchange rates usually go four decimal points. For example, the GBP/USD rate right now 1.9760, which means that for every British Pound you sell, you can buy 1.9760 US dollars. The zero is the ten thousandth digit, so that is what forex pips are in this pair. If the rate goes up to 1.9763, it is said that the exchange rate moved up 3 pips.

However, not all pips are the ten thousandth digit. Some currencies, like the Japanese Yen, go in hundreds. Currently, the exchange rate of the USD/JPY pair is 103.94. This means that for every US dollar you sell, you can buy 103.94 Japanese Yens. As you can see, the exchange rate of USD/JPY goes up to two decimal digits. A pip in this pair is one hundreth of the rate. If the exchange rate goes up to 104.00, it is said the rate went up 6 pips.

This is the reason the spread is important. The bigger the spread, the bigger losing position you start with. Your objective is to get the lowest spread possible to have the best opening position when entering a trade.

Good luck with your trades,
Nadav

nadavs