Download our Mobile Apps
Lesson 3: Currency Trading Conventions What You Need to Know Before Trading
What are Pips in Forex
- Pip = “price interest point”.
- A pip measures the amount of change in the exchange rate for a currency pair.
- For currency pairs displayed to four decimal places, one pip is equal to 0.0001. Yen-based currency pairs are an exception and are displayed to only two decimal places (0.01).
- Some brokers now offer fractional pips to provide an extra digit of precision when quoting exchange rates for certain currency pairs.
- A fractional pip is equivalent to 1/10 of a pip.
OANDA introduced fractional pips – or “pipettes” – to allow for tighter spreads on certain currency pairs. For instance, it is possible to view the EUR/USD currency pair with pipettes (i.e. five decimal places), while currency pairs with the yen as the quote currency can be viewed to three decimal places instead of the default two decimal places.
Forex traders often use pips to reference gains or losses. For a trader to say “I made 40 pips on the trade” for instance, means that the trader profited by 40 pips. The actual cash amount this represents however, depends on the pip value .
Determining Pip Value
- The monetary value of each pip depends on three factors: the currency pair being traded, the size of the trade, and the exchange rate.
- Based on these factors, the fluctuation of even a single pip can have a significant impact on the value of the open position.
- For example, assume that a $300,000 trade involving the USD/CAD pair is closed at 1.0568 after gaining 20 pips. To calculate the profit in U.S. dollars, complete the following steps:
Determine the number of CAD each pip represents by multiplying the amount of the trade by 1 pip as follows:
300,000 x 0.0001 = 30 CAD per pip
Divide the number of CAD per pip by the closing exchange rate to arrive at the number of USD per pip:
30 1.0568 = 28.39 USD per pip
Multiply the number of pips gained, by the value of each pip in USD to arrive at the total loss / profit for the trade:
* For the sake of simplicity, assume all examples are buy transactions.
Naturally, all brokers claim they offer the best spreads, but simply saying something, does not make it so. It is up to you to do your investigative homework to identify brokers that offer the best value.
How Uncertainty in the Market Affects Spreads
- Impending news, such as inflation reports and central bank meetings, are the most common events that cause spreads to widen.
- Once the news of an event is absorbed by the market and it becomes clearer which way the currency will go, the spread generally snaps back to typical levels.
- We’ll talk more about spreads and what causes spreads to vary in Lesson 5 A Primer to Fundamental Analysis .
1996 – 2016 OANDA Corporation. All rights reserved. “OANDA”, “fxTrade” and OANDA’s “fx” family of trademarks are owned by OANDA Corporation. All other trademarks appearing on this Website are the property of their respective owners.
Leveraged trading in foreign currency contracts or other off-exchange products on margin carries a high level of risk and may not be suitable for everyone. We advise you to carefully consider whether trading is appropriate for you in light of your personal circumstances. You may lose more than you invest. Information on this website is general in nature. We recommend that you seek independent financial advice and ensure you fully understand the risks involved before trading. Trading through an online platform carries additional risks. Refer to our legal section here .
Financial spread betting is only available to OANDA Europe Ltd customers who reside in the UK or Republic of Ireland. CFDs, MT4 hedging capabilities and leverage ratios exceeding 50:1 are not available to US residents. The information on this site is not directed at residents of countries where its distribution, or use by any person, would be contrary to local law or regulation.
OANDA Corporation is a registered Futures Commission Merchant and Retail Foreign Exchange Dealer with the Commodity Futures Trading Commission and is a member of the National Futures Association. No: 0325821. Please refer to the NFA’s FOREX INVESTOR ALERT where appropriate.
OANDA (Canada) Corporation ULC accounts are available to anyone with a Canadian bank account. OANDA (Canada) Corporation ULC is regulated by the Investment Industry Regulatory Organization of Canada (IIROC), which includes IIROC’s online advisor check database (IIROC AdvisorReport ), and customer accounts are protected by the Canadian Investor Protection Fund within specified limits. A brochure describing the nature and limits of coverage is available upon request or at www.cipf.ca .
OANDA Europe Limited is a company registered in England number 7110087 limited by shares with its registered office at Tower 42, Floor 9a, 25 Old Broad St, London EC2N 1HQ and is authorised and regulated by the Financial Conduct Authority. No: 542574.
OANDA Asia Pacific Pte Ltd (Co. Reg. No 200704926K) holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore and is also licenced by the International Enterprise Singapore.
OANDA Australia Pty Ltd is regulated by the Australian Securities and Investments Commission ASIC (ABN 26 152 088 349, AFSL No. 412981) and provides and is the issuer of the products and/or services on this website. It’s important for you to consider the current Financial Service Guide (FSG). Product Disclosure Statement (‘PDS’). Account Terms and any other relevant OANDA documents before making any financial investment decisions. These documents can be found here .
OANDA Japan Co. Ltd. First Type I Financial Instruments Business Director of the Kanto Local Financial Bureau (Kin-sho) No. 2137 Institute Financial Futures Association subscriber number 1571.
Trading FX and/or CFDs on margin is high risk and not suitable for everyone. Losses can exceed investment.