PIPS
When IBM's stock goes from 204.45 to 204.46 it has gone up 1 cent. In
terms of USD this is easy to understand. When we work with different
currencies we have to have a common way to measure the price movement.
That price movement is called a PIP. When USD/CAD goes from 1.0010
to 1.0011 we say it has increased 1 PIP
Other currencies are quoted with 2 digits instead of 4 and those PIPs look more like our IBM
example. USD/JPY goes from 80.73 to 80.74 then it has increased by 1 PIP.
Many platforms now quote in 5 and 3 digits respectively. When you
see USD/CAD quoted at 1.00105 and it goes up to 1.00113 it still has only gone 1
PIP. The extra digit gives more detail for people wanting to watch
the smallest price movements.
In the prices below
the AUDNZD is quoted BID = 1.25879 and the ASK = 1.25953. The
difference between the two, the SPREAD is 0.00074 or 7 PIPs. (On 5
digit quotes the last number is ignored in PIP calculations)
The other reason for talking about PIPs is because different traders have
different account sizes. If a trader tells you they earned $100 on a
trade that may or many not be something to brag about. If that
trader has $10,000 in his account and earned $100 on a 10 lot trade it tells you
the price did nothing. If that trader has $500 in his account and
earned $100 on a trade then they really hit a home run.
For this reason traders will talk about the number of PIPs they earned.
A trader might say they earned 30 PIPs on a trade. That is respectable by
all traders. The person with a $500 account that think about earning
$30 dollars and the person with $10,000 can think about earning $3,000 using
the same 30 pips.
Simple PIP Calculator
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