The Forex market allows traders to use profit opportunities in a few different ways, and one of them is called pip trading. This is an important term to understand as a beginner and is the concept this guide will explain in detail.
Pip in Forex: Definition
Pip, symbolized as “P”, is a unit of measure used in Forex. It stands for “price per unit” and quantifies movements of one currency unit against another. Thanks to pips, traders can measure the difference between two currencies.
Pip units depend on the currency pair:
- With EURUSD, the 4th decimal place is the pip unit. So, for example, if EURUSD goes from 1.1840 to 1.1849, EUR is up 9 pips against USD.
- With USDJPY, the 2nd decimal is the pip unit.
Pips fluctuate a lot, so it is important for forex traders to understand them to make sound decisions.
Pip vs Spread in Forex: What’s the Difference?
Spread is another important term to understand in forex. It is the difference between the bid and offer prices for a currency pair.
For example, the spread of EURUSD is generally under 3 pips. This means that, for a standard contract of 100,000 units, the spread cost for one contract is $30.
What Is the Extra Decimal in Currency Pairs Quotations?
Pip is a minimum change in forex price movement. However, some brokers display an extra decimal place on the quote, which may cause confusion.
This extra decimal is a consequence of technological developments in the financial markets. Today, communication networks have become so advanced, and incredible amounts of data can be processed simultaneously.
With faster and more effective data transfers, market quotes have become extremely refined. Brokers can offer 1/10th units of 1 pip!
As a result, the spread becomes narrower. This is good news for you because it means a lower trading cost. Forex brokers can now compete and differentiate themselves through this extra decimal.