Since we now know what a forex quote is, how to know when to buy or sell based on you various analysis we need to know what makes up this various quotes. Here we are goin to learn a little forex lingo. this is known as a PIP. Why should we learn about a pip because its what determines/shows the various movements in the forex market.

This are about to get a bit mathematical but just like your math teacher used to say math is everything. As you’ve probably heard of the terms pips, pipettes and lots being talked about, we’re now going to explain what they are and you should be able to know how the values are calculated.

It is important to take your time or sometime with this information, as it is important knowledge for all forex traders. You shouldn’t even imagine trading until you are legit with pip values and getting profit and loss.

So what is a Pip? Or furthermore what’s a Pipette?

A “pip” is the unit of measurement to express the changes in value between two currencies. If EUR/USD moves from 1.2350 to 1.2351, that .0001 USD rise in value is ONE PIP. A pip is seen as the last decimal place of a quotation. Mostly pairs go up to 4 decimal places, but there are some like the Japanese Yen pairs (that only go to two decimal places).

Also another thing to note: Some brokers quote currency pairs beyond the standard “4 and 2” decimal places to “5 and 3” decimal places. These are quoting FRACTIONAL PIPS, also known as “pipettes.” For instance, if GBP/USD moves from 1.51442 to 1.51443, that .00001 USD move above the previous price is ONE PIPETTE.

Also as each currency has its own relative value, it’s important to get the value of a pip for that certain currency pair. As an example we will use a quote with 4 decimal places. So as to better understand this calculations, exchange rates will be expressed as a ratio (i.e., EUR/USD at 1.2500 will be “1 EUR/ 1.2500 USD”)

Example exchange rate ratio: USD/CAD = 1.0200. To be read as 1 USD to 1.0200 CAD (or 1 USD/1.0200 CAD)

(The value change in counter currency) times the exchange rate ratio = pip value (in terms of the base currency)

[.0001 CAD] x [1 USD/1.0200 CAD]

Or Simply

[(.0001 CAD) / (1.0200 CAD)] x 1 USD = 0.00009804 USD per unit traded

Using this example, if we traded 10,000 units of USD/CAD, then a one pip change to the exchange rate would be about a 0.98 USD change in the position value (10,000 units x 0.0000984 USD/unit). (We use “about” because as the exchange rate fluctuates, so does the value of each pip move)

Lets move to WHAT IS A LOT…

## Leave A Response