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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Wed 20 Sep
08:30 GB- Retail Sales
14:00 US- Existing Homes Sales
14:30 US- EIA Crude
18:30 US- Fed Decision Thu 21 Sep
03:00 JP- BOJ Decision
12:30 US- Weekly Jobless Fri 22 Sep
All Day Flash PMIs
12:30 CA- Retail Sales and CPI Sun 25 Sep
All Day German Elections
POTENTIAL PRICE RISK: HIGH WED -- 08:30 GMT GB- Retail Sales. Will be watched very closely after hawkish BOE.
POTENTIAL PRICE RISK: HIGH WED -- 14:00 GMT US- Existing Homes Sales. Top Housing statistic. Closely followed.
POTENTIAL PRICE RISK: MEDIUM WED -- 14:30 GMT US- EIA Crude Inventories. Most important oil statistic each week. Closely followed.
POTENTIAL PRICE RISK: HIGH WED -- 18:00 GMT US- FOMC Decision followed by Press Conference. No rate Change likely. Announcement of timing and details of December QE taper expected. Could see strong reaction.
POTENTIAL PRICE RISK: MEDIUM THU -- 03:00 GMT JP- Bank of Japan- No rate change expected.
POTENTIAL PRICE RISK: MEDIUM THU -- 12:30 GMT US- Weekly Jobless. Claims distorted by storms.
POTENTIAL PRICE RISK: Medium FRI -- All Day Flash PMIs Due. Usually not a major market mover except for US ISM data (due in early October).
POTENTIAL PRICE RISK: High FRI -- 12:30 GMT CA CPI and retail Sales. Both have the potential to move markets if they miss expectations.
John M. Bland, MBA co-founding Partner, Global-View.com
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Global-View also offers a full fx trading chart gallery that includes fx pairs, such as the EURUSD, commodities, stocks and bonds. In a fx trading world where markets are integrated, the chart gallery is a valuable trading tool. Look for updates on the Forex Forum when the chart gallery is updated.
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