Whenever you trade forex, you have probably heard or have seen symbols like pp (ex. 1000pp); this is a pip or short for “percentage in point” or “price interest point.” When trading currencies, you’ll see this a lot, and without understanding what it is, it can be intimidating or discouraging for novice forex traders to do forex trading. This article will explain the fundamentals of Pip (“percentage in point” or “price interest point.”).
What is Pip?
Pip is the smallest amount an exchange rate can move per unit of currency in a given market. Pip can exchange rates for delivering accurate and valuable information to investors in real-time, without relying on guesswork or manual mathematical processing. Rather than relying on thousands of individual agents to convert local currencies into USD, Pip uses automated algorithms based upon data collected from multiple sources to provide a consistently reliable estimate of the current worth of a specific asset.
In the Forex market, there are two types of pip numbers: “Real-Time”, which indicates the last known par value, and “Historical”, which is the average of the last three reported prices. The historical figure is usually more reliable as it has been updated more often with trades taking place during that period. While traders should treat any real-time information with great caution, historical data is usually more trustworthy as it has been compiled from reliable sources.
A brief history of Pip:
The price of a futures contract has an upward trendline (i.e. prices move within a band that represents expectations for future prices) and a bottom (i.e. prices fall below expectations for future prices). Bonds are often denoted by letter grades between A and F, with A being the highest and lowest. Pip has been used since 1971 by CME Group, and it’s still used today for pricing early in the trading day.
Pip is a fundamental tool used by traders to measure and eventually influence different currencies’ price action. As of March 2018, Pip has been independently implemented in over 1,000 other trading systems across 150 countries.
How does Pip work?
Pips are a unit of measurement for the fluctuation of an exchange rate. The Forex and Futures Markets employ pips as a handy unit of measure to signify interest rates in various currencies, as well as capital or index values. It shows how much the price of one currency varies as the price of another currency changes. Also, keep in mind that a pip is the smallest unit in which a currency’s forex price is transacted. It simply displays how much the price has risen or fallen. This indicates that one Pip should impact the price of a pair of currencies by two times if you trade currencies.
For example, If the Euro drops to 1/10th of its current value against the Dollar, investors will lose ten pips. If the Dollar gains to 1/10th of its current value against the Euro, investors will gain 10 pips. The market trades between two different prices at any given time. The selling price is what someone would be willing to pay, and the buying price is what someone would be willing to sell it for. When the two prices are close enough (close enough for trading to occur), then buyers and sellers meet in the market and trade.
When you trade forex, the price of a pip indicates how strongly the exchange rate is valued in foreign currency. The weaker the Dollar, the more selling pressure there will be on any given pair of currencies. As the dollar strengthens, it creates upward pressure on the prices of non-U.S. currencies as well. That’s why it’s often advised that traders avoid purchasing currencies that are heavily backed by the greenback. Instead, purchase shares of companies with strong currencies such as the Brazilian Real and South African Rand.