Introduction to Forex Pips
Ever wondered what are forex pips? Well, pip is considered to be the way of measuring the movement in forex trading. It can be termed as the smallest move that can be made by a specific currency. Usually, a pip is about 0.01% of the single unit of the concerned currency. This means, it will be the fourth digit right after the decimal point. In case of EUR/USD, a move from 1.0001 to 1.0002 can be termed as a single move of the pip. Similarly, if the pip is likely to move from the value of 1.4511 to 1.4514, we can say that it has moved to three pips. To out it even simpler, when the value of a pip is $10, you would have gained $30 in case of three moves of the pip. This, however, is not the case for all situations. There are certain currencies like the yen that consider the pip to be 1% of the individual currency. So in JPY, a move from 120.01 to 120.02 will be termed as a single move of the pip. The Japanese currency is an exception because they do not come with any specific denomination for the cents.
What are lots?
When it comes to forex trading, lots can be defined as the minimal amount that has been traded for each currency against every transaction of the currency. For most of the regular accounts, one lot would qualify to 100,000 units of your base currency. In this case, you can also open a mini account for trading in mini lot sizes. While you do this, you will find that there are about 10,000 units of the base currency. The lots are an extremely essential concept as it helps the financial markets in standardizing the price quotes. For instance, equity options are priced in a way that each individual contract will represent and exercise the rights against hundred underlying securities of a common stock. With this standardization, investors too will be always aware of how many units they are purchasing with every contract. Likewise, they can also get proper assessment of the price per unit that they pay. Without a similar standardization, the options for valuing and trading will not only be cumbersome but also time consuming.
Understanding the pip spread
The pip spread is in direct relation with the pip and it has a great importance, if you are an options trader, The spread can be denoted as the difference between the selling price and the buying price of a currency. Likewise, it is also a difference between the bid and the ask price. Here, the ask is known as the price at which you are going to purchase and the bid will be the price at which you are likely to sell. For an arbitrary situation, were the EUR/USD is quoted at 1.2502 as the bid, 1.2505 will be ask. Here, the spread will be three pips.
In this case, the spread is the total cost incurred for doing business. For the aforementioned case, you will have to sustain a paper loss which is equivalent to three pips at that very instance for entering the trade. Your contract too here, will have to appreciate by about three pips before you are even. Here, the lower your pip spread is, the simpler it will be for you to profit.
Usually, there is a lower pip spread when the market is bigger and tad more active. The markets which are small and exotic usually come with a high pip spread. Most of the brokers offer various spreads for the varying currencies. Here, the small accounts are likely to have higher spreads than the relatively bigger, regular accounts.