Percentage in point
In finance, specifically in foreign exchange markets, a percentage in point or price interest point (pip) is a unit of change in an exchange rate of a currency pair.
The major currencies (except the Japanese yen) are traditionally priced to four decimal places, and a pip is one unit of the fourth decimal point: for dollar currencies this is to 1/100th of a cent. For the yen, a pip is one unit of the second decimal point, because the yen is much closer in value to one hundredth of other major currencies.[1]
A pip is sometimes confused with the smallest unit of change in a quote, i.e. the tick size. Currency pairs are often quoted to four decimal places, but the tick size in a given market may be, for example, 5 pips or 1/2 pip.
Trading value
A rate change of one pip may be related to the value change of a position in a currency market. Currency is typically traded in lot size of 100,000units of the base currency. A trading position of one lot that experiences a rate change of 1 pip therefore changes in value by 10 units of the quoted currency.[2]
Example
If the currency pair of the Euro and the U.S. Dollar (EUR/USD) is trading at an exchange rate of 1.3000 (1 EUR = 1.3 USD) and the rate changes to 1.3010, the price ratio increases by 10 pips.
In this example, if a trader buys 5 standard lots (i.e. 5 × 100,000 = 500,000) of EUR/USD, paying USD 650,000 and closes the position after the 10 pips' appreciation, the trader will receive USD 650,500 with a profit of USD 500 (i.e. 500,000 (5 standard lots) × 0.0010 = USD 500). Most retail trading by speculators is conducted in margin accounts, requiring only a small percentage (typically 1%) of the purchase price as equity for the transaction.
Fractional pips
Electronic trading platforms have brought greater price transparency and price competition to the foreign exchange markets.[3] Several trading platforms have extended the quote precision for most of the major currency pairs by an additional decimal point; the rates are displayed in 1/10 pip.
See also
References
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