Issue #60: Tuesday, April 11, 2009

By Sean Hyman Ahhhh…the pip. One of the great mysteries of Forex market…or at least, that’s what many new Forex traders seem to think.

In reality, pips are pretty easy to understand, once you get the hang of Forex trading. A pip is simply the smallest increment a currency trade can move (four places beyond the decimal point).

But that’s the easy answer right? So let me take just a moment to explain what a pip means in dollars for your trading account.

Pip Tip #1: Your Pip’s Worth Depends on Your Trading Account

First thing you need to know: How much a pip is worth depends on what kind of account you have. As an individual, you can open what’s known as a standard or a mini-account with your market maker (read: “Forex broker”).

If you have a mini-account, you’re taking a smaller position in a currency than in a standard account. A mini-account lets you control 10,000 units of currency, and a standard account allows 100,000 units of currency.

In other words, you get to control a lot of currency for a small fee. That’s what I love about this market.

So if a pair ends in U.S. dollars (ex. EUR/USD, GBP/USD, etc.) then one pip in a mini-account would be worth a US$1 each time the trade moves. Therefore a two pip spread would equal US$2. If you had a standard account, a pip for a USD pair would cost you US$10. (Or US$20 for this trade.)

This is how much your market maker would charge you to place the above trade. Your market maker would charge you once when you buy and nothing when you sell it back to the market.

Pip Tip #2: If Your Pair Doesn’t End in the Dollar, Then
Check Your FX Dealer’s Site

However, some pairs don’t end in “USD.” So these have to be converted back to dollars to know what they are worth. Each broker will usually have a way of seeing pip costs on their website or on their trading software.

For the USD/JPY pair it’s even a bit less. One pip right now on each mini-lot is around 90 cents per pip of movement. So a 2 pip spread only costs you about US$1.80 in this case.

In either case, it’s easier to think of pips as small movements on your account. But check in with your dealer to see if they have easy mechanisms for you to convert back to U.S. dollars.

I’ll be back tomorrow with more Forex basics. Till then…

Good Trading!
Sean

Sean Hyman, “Professor FX” and Long-Time Currency Analyst Explaining How You Can Succeed in the Currency Markets.
Sean Hyman spends his days teaching his fellow professionals in the industry how to trade the $4 TRILLION currency market. Now he brings his 15 years of financial experience to you. From long-term currency strategies, to quick FX-trading moves usually reserved for the professionals, Sean will tell you everything you need to know to succeed in the currency markets.