Understanding the Values of Pips and their roles on Currency Pairs

In the forex market, there are many traders with various reasons why they are making trades. For retail traders and financial institutions like banks, they trade because they want to gain profits. On the other hand, businesses trade in forex when they buy or sell their products from one country to another. With these being said, we can say that it is essential to exchange currencies for international trade and facilitation, which is possible through forex market transactions. An investor makes speculations to make a profit, which is where a pip may join the picture. A pip calculates rates when a trader makes currency trades.

Understanding the lot sizes of pips

We refer to pip when we talk about a minor price movement of an exchange rate. Usually, a pip is in the fourth place, succeeding a decimal point. One pip, say 0.0001, maybe insignificant, but it will not be when we are talking about bigger lot sizes.

Pips have different lot sizes. It may be a standard lot with 100,000 currency units, a mini lot with 10,000 currency units, or a micro lot with 1,000 units.

How do traders and brokers gain profit from pips and forex trades?

Brokers usually do not charge commissions. So, if they do not ask for commissions, then how do they make a profit? There are terms that we call bid and ask price. The bid price is how much the seller gets, and the asking price is the amount that the buyer pays. The difference between these two is what the broker gets to take home. Say the buyer purchases something at $1.2345, and the seller sold this something at $1.2343. The broker keeps two pips. These two pips are what we call the spread. Usually, a broker may quote prices in one decimal place succeeding the pip. We refer to this pip division as pipettes.

A forex trading account and pips

Upon opening a forex trading account, you will need to use a particular currency. Before going further, we need to clarify that trading is always done in currency pairs. The first in the pair is the base currency and the second in the pair is the quote currency. For example, in EUR/ USD pair, EUR is the base currency while USD is the quote currency.

If your account’s denomination is in US Dollars and US Dollars is the quote currency, a standard lot will be $10, a mini lot is $1, and a micro lot is $0.10. These are the pip’s values not unless there is a significant rise or fall of more than 10%.

However, there are times when a forex trading account may be US Dollar-funded, but it is not the quote currency. In this case, the pip value must be divided by the exchange rate’s dollar and quote currency.

In other cases where the forex trading account’s funding is in terms of a currency aside from the US Dollar, then the pip values are the same if the currency’s funding is the quote currency. Let us assume that the account’s funding is in GBP, the standard lot is €10, the mini lot is €1, and the micro lot is €0.10. If the pairs do not use Euro as the quote currency, then the pip is also divided by the Euro and quote currency exchange rate.