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What is a pip ?
A pip (Percentage In Point) in Forex is the minimum price movement of a currency pair. For example, in the USDJPY it is 0.01 and in the GBPUSD it is 0.0001. A pip is then worth $10, $1 or $0.1, depending on the size of lots you trade:
Lot size Name Pip value
$100,000 Standard $10
$10,000 Mini $1
$1,000 Micro $0.1
Forex has three basic classes:
The first is called a Direct Rate, this is where the USD is the Quote Currency, ie the second value in the Cross Rate. This holds true for such currencies as the EUR, GBP, NZD and the AUD.
The second is called a Indirect Rate. Most currencies are traded indirectly against the U.S. Dollar (USD), and these pairs are referred to as indirect rates. An example is the USD/CAD (Canadian Dollar). The USD is the “base currency”, the CAD is the “quote currency” and the rate quote is expressed as units per USD. An example of a indirect rate is as follows: USD/CAD trading at 1.1500 means that 1 USD = 1.1500 CAD.
Currency pairs that do not involve the USD are referred to as Cross Rates. Even though the USD is not represented in the quote, the USD rate is usually used in the quote calculation. An example of a cross rate the EUR/CHF. In this example of EUR/CHF, the Base Currency is EUR, so to find out what the correct Pip Value would be, in USD, you would have to use the current EUR/USD exchange rate to bring the Quote back into USD. If the EUR/CHF = 1.2227 (for example) and the EUR/USD = 1.3708, then the Pip value in USD would be 1.3708 / 1.2227 or 1.12. In this way you can calculate the correct USD based Pip Value for non USD based Cross Rates.
Fractional pips are a new pricing feature which allows you to see more price action detail. A fractional pip is a tenth of a pip and the addition of this feature allows you to take advantage of smaller price increments and moves in the market.
For example, instead of quoting prices with four digits, i.e. EURUSD at 1.4251 / 1.4253, the quote is now with five digits i.e. 1.42508 / 1.42528 with the last digit (sometimes quoted as a subscript) referring to the fractional pip. If (for example) you are trading Standard Lots sizes and as such the pip value for a EURUSD 100,000 position is $10 then the value of a fractional pip for this same position is $1.