A pip is the smallest amount a price can move in any currency quote. It is used to measure the change in the value between two different currencies.
Unlike the Japanese Yen whose one pip is quoted to two decimal places others are quoted to four decimal places standard value. That is 0.01 for a yen and 0.0001 for other currencies.
A pip indicates the amount of change in the exchange rate of a currency pair. For instance a fall in prices for EUR/USD from 1.0850 to 1.0849 means that price fell by 0.0001 which is equivalent to 1 pip (1.0850-1.0849) .
If price increases from 1.0850 to 1.0851, it has increased by 0.0001 which is 1 pip.
For a USD/JPY, a raise from 112.01 to 112.02 gets us to 0.01 which is 1 pip. Most currency pairs are quoted up to four decimal places and the Yen pairs take up two decimal places standard. When it goes to “5” or “3” decimal places, the last digit is taken as a pipette.
What is a pipette?
A pipette is a fractional pip. If the value of EUR/USD is quoted as 1.08501 and makes a move to 1.08492 it would have moved 9 pipette which is equal to 0.00009. For pairs quoted with the Japanese Yen,the increment value for each pip will be 0.001.
What is a forex lot?
This is the bundle of units/ size of a trade you are making.
Spot forex has been traded in units since the old days till date. Currency is grouped into units of a standard lot =100000 units, mini (10000 units) =1/10 of a standard , micro (1000) = 1/100 of a standard lot and nano (100) =1/1000 of a standard account.
The pip value of a standard lot = 0.0001 or 0.01 for a yen. A standard lot = 100000 units = 1 pip=0.0001 and $10 in currency value.
Here is the math.
Pip value= (100000*0.0001)=$10. Pip value varies with the lot size(account types). For example, for a min lot it would be (10000×0.0001)=$1 and micro lot (1000×0.0001)=$0.1.
We shall learn more as we explore/ go deep into the next lessons. Don’t go off, still have more interesting staff to learn. This is summarized below for easy understanding showing the size in units and pip value . Knowing the lot size is very important because you will need it to determine the pip value for every trade you take. It’s the lot size that makes the pip value significant since it is just a small movement price can move.
Now that we know what a pip and forex lot is, lets get to the real fun part. How to calculate a pip value.
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