Pip is identified as a smaller amount of standardized unit in which the currency quote can be changed repeatedly. In short, PIP stands for “Percentage In Point” in the Forex trading market. It can be measured with the currency quote or terms in the currency selected. Primarily it refers to the $0.0001 for U.S.-dollar related currency or 1/100th of 1%. The primary objective of PIP is to protect the investors from large scale losses in their trading complex. And the currency pair refers to the quotation of two different currency types where their values are set against each other. The primary listed currency values are called “Base Currency,” and the secondary quoted currency values are named as the “quote currency.” It indicated that the amount of quote currency that have to purchase for a unit of the base currency. All currency types are identified with an ISO Currency Code and alphabetic three-letter-based code that is usually involved with the international trading market as well.
In this process of Forex Trading, the currency pair includes four decimal numbers, and PIP stands for the last yet smallest out of those four numbers. Even though the PIP is a small number and an amount, Forex investors and traders are focusing highly on these PIPs as a simple difference of a little PIP could make a significant loss or a profit in this Forex trading market. Although PIP is the most basic measuring unit in Forex trading, the investors’ awareness in appropriates usage of the PIPs must be improved. Because the change of a one PIP in dollar or a given value depends on don the number of Euros or currency that the trader has purchased. Usually, it is believed that the Pip values could be changed with the amount of underlying currency. In most instances, the PIP value is determined based on three basic factors as the currency pair being traded, the size of the trade, and the exchange rate and due to these factors, a simple fluctuation PIP is strong enough in making a significant change of loss or profit gaining in the Forex trading market. Further, it is believed that the basic calculation of the PIP values can be done successfully by following three significant steps with an example based on the currency pairing as USD/CAD are,
- Determination of the number of quote currency that (CAD) stands for in each PIP.
- Calculation of the number of base values counted in per PIP. (USD)
- and it is finally determined with the exchange as a loss or a profit.
Significantly, the value can be changed with the variable currency pairing that a trader would use for the exchanging process, and thereby the amount calculated for each pair could be varied from pair to pair. As the basic in currency pairing, it is done with the bid(buy price), which refers to how much the quote currency that a trader needs for a single unit of base currency values. The ask(sell price) stands for how much a trader would obtain in quote currency for selling a single unit of the base currency. Especially, In Forex, it is not like the share market or the commodity market because this always involves the exchanging of the currency, which means selling one currency to buy another in straightforward means. Therefore economic data like gross domestic product(GDP) information, interest rates, and significant economic announcements are primarily affected by the process of currency pairing. It is the currency pair of euro against the U.S dollars is the traditional practice n the Forex trading market with the identification of the above-mentioned currency pair is with the highest liquidity and heavy usage by the traders.
A more extensive range of currency pairs is now available in the Forex trading market, which could be flexible enough in proving options or the investors to choose among them. The currency pairs where the trades are mostly volumed against U.S dollars are called the major currencies. They are categorized as below,
- Major currency pairs:
e.g., GBP/USD, EUR/USD, and USD/JPY
- Minor pairs:
e.g., USD/ZAR, SGB/JPY, CAD/CHF
- Emerging currency pairs:
e.g., USD/CNH, EUR/RUB, and AUD/CNH
- Exotic pairs:
e.g., EUR/CZK, TRY/JPY, USD/MXN
Among them, AUD/USD and USD/CAD are also named as the commodity currencies as both countries, Canada and Australia, are rich with commodities, and the fact of currency paring would directly affect them as well. All of these currency pairs have a very liquid market that is open 24 hours every business day. And those currency pair which are not associated with the U.S dollar are called the Minor teams and slightly spread wider than other currency pairs while the cross pairs are involved with the individual currencies including UR/GBP, GBP/JPY and EUR/CHF and emerging market included with the exotic currencies which are not liquid and spread much more comprehensive.
After all is accepted that under Forex, not everyone has the same nominated same currency values and whatever it is, it has to be converted into whatever currency that is in Forex trade. Thereby the “found PIP value” diverts to an essential point in the Forex trading market. And a clear awareness about the PIP values relate to the currency pair is a must for the successful continuation in the Frest trading market, the global market of foreign exchange.