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Understanding Purchase in Points (PIP) in Trading

It is not easy for an individual to trade in the foreign exchange market without having proper forex education. In a foreign exchange market, currency trading takes place which involves comparing currencies of different countries against each other. The major currencies in the forex market are U.S dollar, British Pound, Euro, Japanese Yen and Canadian Dollar. Right trading psychology helps in correct speculation of the changes in exchange rates between different countries’ currencies. The difference in exchange rates between these currencies is measured in PIPs.

PIP stands for percentage in points. It is the smallest price movements in exchange rates. The currency is generally quoted till the four decimal points (exception for Japan’s Yen, as it is quoted to 2 decimal points only). Hence a PIP is equal to 1/100th of a percent. It is also known as basis point.

For example, in case of EUR/USD of 1.3500/1.3508, the PIP spread is 3. To calculate the value of PIP in a currency pair, the trader should divide one pip in the form of a decimal with the current exchange rate and further multiplying it the notional amount of the trade.

Updated: March 20, 2013 — 1:42 am

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