If you have signed up for a Forex course – or are considering signing up for one soon, then the term ‘pips Forex’ is a term you are likely to encounter sooner or later. Don’t be alarmed about it, though, as it is not a hard term to make sense of. In fact, the word pip as used in the Forex trade is not even a new word or a piece of fancy vocabulary – if the study of language has never quite been your thing. As it turns out, the term pips – as used in Forex trade – is an acronym, rather than yet a new vocabulary you have to assimilate.
Pips is plural for pip which is acronym which stands for percentage in point. Now you will need a basic understanding of math (rather than linguistics) to understand the implications of the pip, as we briefly explain it here. Still, if you are more linguistically (rather than numerically) inclined, then the pip can be simply explained to you as the percentage of a percentage point.
This is to say 1 percent of 1 percent makes 1 pip, while 5 percent of one percent makes 5 pips. Similarly, 6 percent of 1 percent makes 6 pips while 9 percent of 1 percent makes 9 pips. Notice that the base for our calculation remains 1 percent because a pip, as introduced is a percentage of a (single) percentage point. Clicking here for get more info…
The use of pips Forex trade is necessitated by the fact that the Forex trade is a low margin trade. As it were, Forex traders seek to benefit from the fluctuations that occur in foreign currency exchange rates which are in turn caused by a complex set of economic, political and social events in the country’s whose currencies are being traded as well as in the country where the Forex trade is being carried out. Sometimes foreign currency exchange rates do change by a whole percentage point or even a number of whole percentage points – but this a very rare occurrence, unless either the country owning the currency in question is experiencing some very radical (political, economic or social) occurrences, causing a huge depreciation (or appreciation, though this would be rather hard) of its currency.
Ordinarily though, the changes in foreign currency prices are subtle – in the range of 0.0001% to 0.0009% and use of the unit of pips – which is the smallest possible price change used in the Forex trade – seeks to give a convenient way of stating this changes. A price change of 0.0001% would be referred to as a price change of 1 pip while a price change of 0.0009% would be referred to as a price change of some 9 pips and the words 1 pip or 9 pips are obviously easier to say and less discouraging to a person, than telling the person 9 (who might be a Forex novice) that the price of the foreign currency units they happen to be holding rose by only 0.0001% and 0.0009% respectively.
By the way, while a rise of 9 pips, 0.0009% would sound discouraging outside the Forex trading circles, the same would be cause for celebration for a trader who happens to be holding many units of a currency which rises by the same 9 Forex pips or 0.0009 percent, as it were.