|PIPS, dealing rates, bid, ask and spreads|
Price Interest Points (PIPs)
The last decimal place is called a "PIP" or "POINT"
Money is made or lost by change in the PIPs
PIPs are the unit of measure whereby you make or lose money in the currency market. As the PIPs increase, so does your account value. Each PIP is worth a certain amount, depending on the currency and whether or not you are trading regular size lots or mini lots. As this last decimal place increases or decreases, you will make or lose money.
If the currency has the USD as the quote, it is worth $10 per PIP. Therefore, if the EUR/USD exchange rate moves from 1.3455 to 1.3555 the contract will increase in value by 100 PIPS or $1,000.
1.3555 - 1.3455 = 100 PIPS x $10 per PIP = $1000
If the USD is the quote currency (second) each PIP is worth $10
If the quote is another currency the PIP value will be either above or below $10, depending on the currency.
The value of each PIP will depend upon the currency pair and which currency is in the quote position. Again, if the USD is the quote currency, then each PIP is worth $10 per PIP. If the quote currency is something other than the USD, the PIP value will generally be less than $10. The formula for non USD quotes is as follows: If there are four decimal places as in the USD/CHF where the rate is 1.2345, the formula would be: 0.0001 x 100,000 / 1.2345 = $8.10/PIP
If there are two decimal places as in the USD/JPY where the rate is 115.50 the formula would be: 0.01 x 100,000 / 115.50 = $8.65/PIP
When trading currencies you will often see a two-sided quote, consisting of a bid and ask price. The bid is the price at which you can sell the base currency (at the same time buying the counter currency). The ask is the price at which you can buy the base currency (at the same time selling the counter currency).
BID, ASK and SPREAD
BID -- The Price you Sell
ASK -- The Price you Buy
SPREAD -- The difference between the Bid and Ask