FX Basics: Pips & Spreads Explained
What are PIPS?
A PIP is an acronym for percentage in point.
This percentage in point represents the smallest value of measurement for currencies on the forex market.
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Unlike dollars and cents which are calculated up to two decimal places, the currencies on the forex market are calculated up to the fourth decimal point.
The smallest move that a PIP can have is .0001, which represents 1/100th or commonly referred to as 1 basis point.
The one exception to the fourth decimal point is the Japanese Yen, which is only calculated up to two decimal places.
What is The Spread?
PIPs are calculated in terms of currency pairs. Unlike stocks or futures which trade solely based on their own evaluation, the forex market compares the value of two currencies to arrive at a Bid and an Ask price, which is expressed in terms of PIPs.
So, for example, if the USD/CHF is worth 1.15351, then that means that $1 US Dollar is worth 1.1531 Swiss Francs.
But the price is different for the bid and for the asking. So, if the price of the EUR/USD forex pair moved from 1.33800 to 1.33920, it is said to have climbed by 12 ‘pips’ (92-80=12).
To show the BID/ASK prices, another example would be EUR/USD dealing at 1.33800/1.33808 (in this case the spread is 0.8 pips or 0.00008). The exceptions to this are the JPY pairs which are quoted to just 2 decimal places.
A USD/JPY price of 97.41/97.44 displays a 3 pip 'spread'.
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