Pips, dealing rates, bid, ask and spread
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PIPs are the unit of measure whereby you make or lose money in the currency market. As the PIPs increase, so does your account value. Each PIP is worth a certain amount, depending on the currency and whether or not you are trading regular size lots or “mini” lots. As this last decimal place increases or decreases, you will make or lose money.
For example:
If the currency has the USD as the quote, it is worth $10 per Pip. Therefore, if the EUR/USD exchange rate moves from 1.3455 to 1.3555 the contract will increase in value by 100 pips or $1,000.
1.3555 – 1.3455 = 100 pips x $10 per pip = $1000
The value of each pip will depend upon the currency pair and which currency is in the quote position. Again, if the USD is the quote currency, then each pip is worth $10 per pip. If the quote currency is something other than the USD, the pip value will generally be less than $10. The formula for non USD quotes is as follows: If there are four decimal places as in the USD/CHF where the rate is 1.2345, the formula would be: 0.0001 x 100,000 / 1.2345 = $8.10/pip
If there are two decimal places as in the USD/JPY where the rate is 115.50 the formula would be: 0.01 x 100,000 / 115.50 = $8.65/pip
When trading currencies you will often see a two-sided quote, consisting of a “bid” and “ask” price. The ‘bid’ is the price at which you can sell the base currency (at the same time buying the counter currency). The ‘ask’ is the price at which you can buy the base currency (at the same time selling the counter currency).
Labels: Trading guide
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