FOREX PIP Defined
Forex trading generates profits from the changes in value of different currencies. A PIP is the smallest amount of quoted change in a currency value.
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Identification
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PIP or pip stands for percentage-in-point and is the smallest amount the value of a currency can move, usually the fourth decimal place. If the Euro to U.S. Dollar (EUR/USD) is quoted at 1.4173, and changes to 1.4175 the exchange rate increased 2 pips.
Function
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FOREX currency rates are quoted in currency pairs such as EUR/USD or USD/CAD (U.S. dollar to Canadian dollar). The first currency is the "base" currency and the second is the "terms" and the currency the quote is designated in.
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Value
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The standard FOREX contract size is 100,000 units of the terms currency. This makes the value of one pip 10.00 in the terms currency. A mini FOREX contract is 10,000 units and a pip is 1.00 of the terms currency.
Considerations
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To calculate the value of a pip in the base currency divide by the exchange rate. If the USD/CHF (U.S. dollar base / Swiss Franc terms) exchange rate is 1.310, one pip change on a standard contract is 10 Swiss francs or 10 divided by 1.310 equals $7.63.
Potential
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FOREX brokers allow traders to purchase contracts on the margin. The 100 to 1 leverage allows a trader to control a $100,000 contract with just $1,000 and earn or lose $10 with each pip change in value.
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References
- Photo Credit Image by Flickr.com, courtesy of viZZZual.com
