The term used in currency market to represent the smallest incremental move an exchange rate can make. Depending on context, normally one basis point (0.0001 in the case of EUR/USD, GBD/USD, USD/CHF and .01 in the case of USD/JPY).
- What are pips and points?
- Example of Pips and Points Calculation
- What occurs in this case?
What are pips and points?
1 point is the minimum unit of price change.
Record quotations of currencies, with four significant digits after the decimal point is a standard entry for all major currency pairs, except the yen.
This couples EUR / USD or GBP / USD price of one item to be exactly equal to one dollar, if you commit a transaction size of 10,000 units of base currency.
To franc (USD / CHF) the price of one item will be approximately $ 1, and it will be little change with a change in course.
For the Japanese yen record is as follows: USD / JPY 117.10/117.15.
As can be seen, after a point is only two significant digits. This recording is useful because it allows to maintain the «weight» of one item.
It will be about 1 dollar in the transaction in the amount of 10,000 dollars.
To calculate the value of the item in U.S. dollars use the following formula: The cost of item = (Item * Lot) / Exchange Rates quotes to USD
Example of Pips and Points Calculation
Currency Pair: GBPUSD Lot: 10000 Value item = (10000 * 0.0001) / 1 = 1 $
Currency Pair: USDCHF Lot: 100000 Course USDCHF = 1.6815
The value of the item = (100000 * 0.0001) / 1.6815 = $ 5.95
Currency Pair: EURJPY Lot: 1000000 Exchange EURJPY = 115.54
Course USDJPY = 132.58 cost of item = (1000000 * 0.01) / 132.58 = $ 75.43
Currency Pair: EURGBP Lot: 20000 Exchange EURGBP = 0.6128
Exchange Rate GBPUSD = 1.4228 USDGBP = 1 / (Rate GBPUSD) = 1 / 1.4228 = 0.7028
The cost of item = (20000 * 0.0001) / 0.7028 = $ 2.85 FX Grant clients easily can calculate the cost of the item in the Forex Pips Calculator.
What is a reverse, partial closure and the addition of the position? As with the calculated profit / loss?
When trade occurs occasionally wish to close your existing position is not full, but only a part. Alternatively, perform a so-called reverse position, that is, for example, you want to sell an amount greater than you have purchased.
What occurs in this case?
Let’s have a look on a specific example of a partial closure of positions.
You have bought 100,000 EUR against USD at the exchange rate of 0.8800, when the rate of 0.8850 marks, you decide to sell 50,000 EUR against USD.
In the end, you still get in the position of 50,000 EUR at the rate of 0.8750.
Ie in this case the profit on the partial closure is not joined to your deposit, as reflected in the change (in the best way for you) courses are open positions.
Let’s have a look on a example of transaction-type reverse.
You have bought 100,000 EUR against USD at the exchange rate of 0.8800, when the rate of 0.8900 marks, you decide to sell 200,000 EUR against USD.
In the end, you have a position: sell 100,000 EUR at the rate of 0.9000.
Ie in this case, profits from the reverse is also not adhered to your deposit, as reflected in the change (in the best way for you) rate of new positions.
In both examples can be described independently satisfied fidelity “arithmetic” a simple way – the whole process in each case can be represented as two transactions.
For example, in the second case – the purchase of 100,000 EUR, and selling 100,000 EUR and the same time selling another 100,000 EUR.
If the steps were made this way, your deposit would have joined 1,000 USD gains, and the last sale of 100,000 EUR to impact on your record for the current exchange rate, ie 0.8900.
If we look at the results of the transaction with the coup – all the same – we have the position of selling 100,000 EUR at the rate of 0.9000 at the current market of 0.8900.
Accordingly, if you want to close down – we get the same 1,000 USD profit.
It is obvious that in some market situations more advantageous to use the above options transactions, as well as in fact they are replacing two steps and allows one to save time.
Another example is that a better understanding of mathematics: Open position on the EUR against the USD – purchased 20 000 at the exchange rate of 0.8900, when the market level of 0.9000, you decide to coup with the increase in the lot.
Ie You conclude a deal to sell 50 000 EUR against USD.
The result will be:
+ 20 000 EUR discovery rate multiplied by 0.8900 equals 17 800 + USD – EUR 50 000 multiplied by the rate of revolution is equal to 0.9000 – 45 000 USD – 30 000 EUR – 27 200 USD