Lesson 7: An Explanation of Pips and Fractional Pips
Lesson 7: An Explanation of Pips and Fractional Pips
In our last lesson we learned about the different position sizing options available to retail forex traders. In today's lesson we are going to continue our forex trading course with a look at what pips and fractional pips are.
Traditionally a 1 pip move in the market was the smallest move that a currency could make. Another way of looking at this is that a 1 pip move in the market is a move up or down by 1 of the number sitting the furthest to the right of the decimal point in the forex quote.
As most currency pairs have 4 decimal places a 1 pip move in the market would be a move up or down by 1 of the number sitting in the 4th decimal place spot in the quote. So for example the EUR/USD currency pair is trading at 1.5678 as of this lesson so a move to 1.5679 would be a 1 pip increase in the quote and a move to 1.5677 would be a 1 pip decrease.
In the JPY based currency pairs where there are two decimal points, a 1 pip move in the market would be a move up or down by 1 of the number sitting in the second decimal point spot. So for example as of this lesson USD/JPY is currently trading at 101.28. With this in mind a move to 101.29 would be a 1 pip move up in the market and a move to 101.27 would be a 1 pip move down in the market.
If you noticed at the beginning of this lesson I said that a 1 pip move in a currency pair has traditionally been the smallest move that a currency pair could make. I say this because as electronic platforms have brought greater price transparency to the forex market and price competition has heated up some platform including the one that we have been using have added an additional decimal place to their quotes. Known as Fractional pips, now many of the currency pairs which have traditionally been 4 decimal places quoted out to 5 decimal places and the pairs which have traditionally been quoted out to 2 decimal places quoted out to 3 decimal places.
Lets quickly login to our demo trading platforms to see what I am talking about. If you have not done so already I encourage you to pause this video now and click the demo registration link above this video if you are watching on InformedTrades.com or to the right of this video if you are watching on Youtube.
Once logged into your demo trading platform you can see this extra digit in the upper right hand corner of the quote for each currency pair. Fractional pip pricing is an advantage to the individual trader as it allows the market maker to quote in increments of less than 1 pip, offering for example a spread of 2.5 pips on EUR/USD instead of 3 and saving the trader a half a pip on the trade.
Thats our lesson for today, in tomorrow's lesson we will look at how to calculate profits and losses in the forex market so we hope to see you in that lesson.
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WEEKLY Forex Economic Calendar: 28 Mar Tue
14:00 US- CB Confidence 29 Mar Wed
14:00 US- Pending Homes Sales
14:30 US- EIA Crude 30 Mar Thu
12:30 US- Weekly Jobless
12:30 US- GDP
23:30 JP- CPI 31 Mar Fri
7:55 DE- Jobless
8:30 GB- GDP
9:00 EZ- flash HICP
12:30 US- Core PCE Deflator
14:00 US- final Univ of Mich 2 Apr Sun
00:00 AU/NZ- Clocks "Fall Back"
Forex Market: items driving the market to start the new week:
Event Risk: The fallout from Heathcare fiasco last Friday has started to abate. The new focus is worry about the Trump economic agenda with getting legislative approval a growing issue.
Event Risk: A new Scotland Independence referendum will be considered by the Scottish Parliament today, while the May government will invoke EU Article 50 tomorrow (March 29). Last week's terrorist event could strengthen her hand.
There is a growing perception that the ECB might start to consider stepping back from excessive policy ease. Watch flash HICP data Friday. The March German Ifo Survey (Monday) was considerably stronger than expected and will be noted by the ECB.
Lots to consider. Please comment...
John M. Bland, MBA co-founding Partner, Global-View.com
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