The price interest point is commonly called the PIP in forex trading. It’s one of the most fundamental concepts of currency trading and is useful for determining profits and losses on any trade. Let’s talk about the price interest point and it’s importance in forex trading. They are the key to real forex profits.
What is the Price Interest Point?
The price interest point is the smallest unit of change in a foreign currency pair. Currency pairs are usually quoted to 4 decimals places so 1 PIP is equal to a change in the currency exchange rate of 0.0001. For example, if the EUR/USD exchange rate changes from 1/1.1121 to 1/1.1129, then the exchange rate changed by 8 PIPs.
Price Interest Points vs. Ticks
Ticks and pips are often confused in forex trading. They seemingly mean the same thing from someone stock trading. Both terms refer to the same thing, the minimum price change. Ticks are generally not often used in forex, but when they are used, they can refer to the minimum amount of time between trades. In futures trading, a pip and a tick can also mean very different things.
Price Interest Points vs. Points
Again, this is a difference between markets. Points are not generally used in the forex market but are used quite often in stock markets. The different stock markets decide how many ticks is in a point and generally means an increase in one unit. For the NYSE, one point is an increase in $1 in stock price. In a forex use case, an increase of 10,000 pips would equal one point. Again this isn’t often used.
Price Interest Points vs. Basis Points
There is a relationship between pips and basis points. A basis point is 1/100th of a percent. Basis points are often used in banking and finance concerning interest rates and other changes in percentages. Basis points are used in forex and are related to pips. PIPs are quoted to 4 decimal points. This means that 100 pips is equal to 1 basis point.
What is a Fractional PIP?
Many electronic trading platforms use fractional pips to provide more transparency and an increased chance to take advantage of small forex rate changes. A fractional pip is equal to 1/10 of a pip. This allows electronic trading platforms to report exchange rate pairs to 5 decimals. The increased rate resolution provides a better picture of the exchange rate.
Why are PIPs Important?
The price interest point is important because it provides a standard way of expressing exchange rate changes. This makes it easy to discuss value changes in specific exchange rate pairs as well as evaluating potential increases from trading strategies. You’ll find that many traders talk about PIPs so it’s important to know what a PIP is when talking with AlfaTrade expert traders.
Calculating PIP Values
The easiest PIP calculation example is the EUR/USD. This example calculates the PIP value and profit/loss on two different EUR/USD trades.
PIP Value Example
Calculating PIP values for any exchange rate involving US dollars is quite easy. It’s called a direct rate. Using our exchange from above of $1.1121 per Euro, the value of 1 pip on a 10k mini Euro lot is $1. For example, a change from 1.1121 to 1.1129 is an increase of 8 pips. On a 10k mini Euro lot size, the increase of 8 PIPs is $8. The calculations are similar for a 300k Euro lot size. The 8 pips change is multiplied by the result of 300000/10000. This equals $240.
PIP Value Profits
The hypothetical example given above for the mini Euro lot size of 10k Euros gave a profit of $8. It’s important what kind of percent return on the trade was realized to see the real profit. It cost $11,121 to purchase the 10k Euros. A profit of $8 on $11,121 is 0.07%. This may seem like a small increase, but in conjunction with margin trading, it can be impressive.
Profiting from Small PIP Changes
It’s possible, through margin trading, to benefit significantly from small price interest point changes. This can greatly magnify PIP changes, both on the positive and negative side. On a typical 1% margin account, our hypothetical trade yields 7% ROI. This demonstrates that it doesn’t take large PIP changes to produce a rewarding return.
Now that you know what a price interest point is and how it relates to forex trading, you can use this knowledge to profitably trade forex on AlfaTrade.