Get to know Pips, the Smallest Unit in Forex Trading
What is Pips or Price Interest Points in Forex Trading? Pips are the smallest unit of a currency pair traded on the forex market. If you are a trader in stocks, bonds or commodity futures, you are usually used to quoting prices in dollars or cents, but in the forex trading market, the unit used is Pips.
Pips are also often called base points by traders out there.
In most currency pairs generally traded on the forex market. one pip represents one tenth of one unit of currency traded. But there are exceptions to cross currency pairs such as those that use Japanese Yen (JPY). 1 pips represents one hundredth of a Yen. At first one pip is the smallest price point unit on the forex market. Currently there are many forex brokers that divide 1 pip into smaller ones or one pip divided by 10 (brokers that use 5 digit decimals).
Value of 1 Pips
What is the value of one pip? To answer this question depends on the Forex Dealer / Broker that you use. Every broker has different policies in calculating one pip, but all of them are basically the same. For example Broker A that uses four Digits, the value of one pip is the same as every 1 tick of price movements. Then Broker B uses five digits, the value of I pip broker B is equal to 0.1 movement from 1 pip Broker A. Or 1 pip the movement of Broker A is equal to 10 pips the movement of Broker B. Do you understand? If not, let’s see the illustration below
Broker A (4 digits) = EUR / USD currently priced at 1.3001. Then 5 seconds later EUR / USD moves to 1.3000 or drops 1 pip.
B broker (5 digits) : EUR / USD currently priced at 1.30015. Then 5 seconds later EUR / USD moves to 1.30000 or drops 15 pips.
Now you understand the difference, right?