What does a pip mean?
You may have come across terms such as making 400 pips of profit, which would seem to indicate that a pip is some sort of currency value. However, the situation is actually a little more complicated than that.A pip does measure the change in value of a currency – it is the smallest price change that any currency can make. Most pips are equal to a 0.0001 price change. For instance, the EUR/USD currency pair price might change from 1.4030 to 1.4031 – this is a one-pip movement.
However, there is an exception to this definition of a pip. Where a currency has a low unit value, the price is only quoted to 2 decimal places, not 4. In this case, a pip is 0.01 rather than 0.0001. The best example of this is the Japanese yen – if the USD/JPY currency pair increases from 104.22 to 104.23, this is a one-pip change.
The other important thing to remember about pips is that not all pips are equal. The value of a pip is tied to the denominating currency in a currency pair. Therefore, a 100-pip rise in CAD/USD is the same as a 100-pip rise in GBP/USD – both are a rise of one US cent. However, when the denominating currency is different, then a pip does not have the same value. For instance, a 100-pip rise in USD/CHF is a rise of 1/100 of a Swiss franc, not one US cent.
How does this relate to spreads?
When the price of any currency pair is quoted, there are actually two prices. The first is the bid price – this is how much is being offered for the currency pair. The second is the ask price – how much sellers are asking. The difference between the two is called the spread and is measured in pips.Buy orders are executed at the higher ask price, while sell orders are executed at the lower bid price. This means that if a trader buys and then sells immediately, they will always lose the amount of the spread. Because of this, forex traders generally look for low spreads, since the spread is the equivalent to a tax – although a private one – on each transaction.
Of course, the money that traders lose on spreads has to go somewhere. In fact, the spread ends up with the market maker or broker – this is where they make their profits. This is also why forex trading typically doesn’t involve commissions, since the broker’s profit is already built into each trade.
Editors’ Picks
AUD/USD: The hunt for the 0.7000 hurdle
AUD/USD quickly left behind Wednesday’s strong pullback and rose markedly past the 0.6900 barrier on Thursday, boosted by news of fresh stimulus in China as well as renewed weakness in the US Dollar.
EUR/USD refocuses its attention to 1.1200 and above
Rising appetite for the risk-associated assets, the offered stance in the Greenback and Chinese stimulus all contributed to the resurgence of the upside momentum in EUR/USD, which managed to retest the 1.1190 zone on Thursday.
Gold holding at higher ground at around $2,670
Gold breaks to new high of $2,673 on Thursday. Falling interest rates globally, intensifying geopolitical conflicts and heightened Fed easing bets are the main factors.
Bitcoin displays bullish signals amid supportive macroeconomic developments and growing institutional demand
Bitcoin (BTC) trades slightly up, around $64,000 on Thursday, following a rejection from the upper consolidation level of $64,700 the previous day. BTC’s price has been consolidating between $62,000 and $64,700 for the past week.
RBA widely expected to keep key interest rate unchanged amid persisting price pressures
The Reserve Bank of Australia is likely to continue bucking the trend adopted by major central banks of the dovish policy pivot, opting to maintain the policy for the seventh consecutive meeting on Tuesday.
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