Pips Trading

Pips Trading As A Forex Investment Forecaster

The importance of slight changes in values of products must never be underestimated, and time can no longer be taken for granted. In the foreign exchange market, experienced traders reckon that one minute is such a long period of time and an almost insignificant amount of change in the forex exchange rate can cause unbelievable changes in the trader's account. It is for this reason that most dealers closely monitor the value of pips in foreign exchange trading.

Price Interest Point (PIP)

Price Interest Point (PIP) in day trading currencies represents the slightest fluctuation in the currency's price, and is much similar to the concept of ticks for stocks. Much concern has been attributed to the worth of pips in foreign exchange trading.  The value of forex FX trading currency pips much depends on the lot or size of the contract with most being in units of hundred thousand units of the basic currency.

Value of PIP

From this information the value of a pip can be determined quite easily. If for example the Euro/USD ratio is 1.2125 and the lot size is 100,000 Euros, it is true that the worth of the lot would be 121250 US dollars. A fluctuation of 0.0001 which can be taken to be one pip, the worth will be 10 US dollars. From this example it is noted that any moment the value of the Euro/USD changes by one pip, resulting change is equivalent to 10 US dollars.

When currencies are quoted in terms of US dollars, the forex FX trading currency pips remain fixed, in this case, a value of 10 US dollars to four decimal places. This situation is usually referred to as a static currency pip since their values do not change relative to the US dollar. Currencies such as the Euro, British Pound, and Australian Dollar verses the US dollar usually gives static forex FX trading currency pips.

On the other hand, variable pip value is realized when the US dollar is taken as the base currency. Currencies with variable forex FX trading currency pips include the JPY, CHF, CAD among numerous others. Assuming from the earlier example that the USD/JPY ratio is 107.65 and that one US dollar = 107.65JPY, and maintaining a lot size of 100,000 US dollars, the value of one pip could be calculated. In this case the forex FX trading currency pip will be worth 1000 yen. Dividing this value by the exchange rate gives 9.29 US dollars. It is noted thus that the value of the pip changes with change of the exchange rate.

Gaining More Using PIP

Generally, professional traders realize that it is important to spread pips in foreign exchange trading as much as possible. A low spread of 2 pips on the Euro/USD will significantly improve chances of excelling in the currency trade. In order to further secure the benefit of pips trading, inter-bank activities should be carried out efficiently and in real time since exchange rates continuously change with time. Certain software may also be applied to aid in performing time efficient trading activities.