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The Biggest Mystery in the Forex Market…Solved

Sean Hyman (July 27, 2009)

Monday, July 27, 2009

By Sean Hyman If I had to choose a single thing that stops investors from trading in the Forex market, I’d have to say it’s intimidation.

New investors are intimated by the language…the new trading platform…the quick-moving prices…and as I teach my Forex classes, even brokers become confused about the all illusive “pip.”

Indeed, I’ve come to think of it as the biggest mystery in Forex. And it’s what stops well-meaning investors from earning what they could be earning in the Forex market.

So let’s solve this mystery right now shall we? A pip is simply the smallest price change that an exchange rate can make. Since most major currency pairs are priced out to four places past the decimal point, when the last digit to the right moves up or down by one increment, that’s a one-pip move.

Think of a stock. If a stock increases a penny – and moves from US$50.00 up to US$50.01 – then that stock just made the smallest incremental movement possible.

If you were trading the euro vs. the U.S. dollar (EUR/USD) and that exchange rate moves from 1.2500 up to 1.2501, then it increased one pip. If it fell from 1.2500 to 1.2499 then it decreased one pip.

Have a Forex question? Email me at info@worldcurrencywatch.com.

Happy Trading,

Sean Hyman, aka “Professor FX”

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