If you trade a foreign exchange (forex) market, then you should never underestimate pips. A pip stands for ‘percentage in point’ or ‘price interest point’. Pips in forex trading represents the possible basic movement of a currency pair in a market.
In most currency pairs, like GBP/USD (British pound/U.S. dollar, a pip equals 1/100 of a percentage point. While, for any pairs involving Japanese yen, a pip equals to one percentage point and it is counted in the second place following the decimal in the price quotes.
Pips calculate the payment rates of forex participants within the forex market when they make currency trades.
The Differences between Pips, Pipettes, and Spreads
The value of the pips on your trade is heavily affected by your lot size. There are three different lot sizes, a standard lot (100,000 units), a mini lot (10,000 units), and a micro lot (1,000 units).
Meanwhile, spread defines as the difference in pips between the bid price (the price a seller receives) and the asking price ( the price a buyer receives). In other words, the spread is the way your broker makes money since most of the forex brokers do not charge a commission on individual trades.
For instance, you buy at the ask price of 0.9714 and sell at the bid price of 0.9711, then the broker gets the spread of 3 pips.
Commonly brokers quote prices to a decimal put after a pip. Pipettes are these divisions of pips. Pipettes allow greater flexibility on spreads as well as pricing.
Pip Value for Each Pair
When you open your forex trading account, the currency you choose will determine the pip value of most currency pairs. The rules of the pip value for each currency are the same, but here I use the U.S. dollar as an example.
If you open a U.S dominated account, then, every pair that put the U.S dollar in the second, or as a quote currency, will have $10 pip value for a standard account, $1 for the mini lot, and $0.10 for micro lot.
If the U.S. dollar experiences significant fall or rise, by more than 10%, then there will be a change of pip value.
On the other hand, if you fund your account with U.S. dollar, but the dollar is not the quote currency, then then the pip value is from the division of the usual pip value by the exchange rate between the dollar and the quote currency.