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Getting To Know The Forex "Pips".
As you would have observed in our previous example, the difference in the forex bid quote and forex ask quote lies in the fourth decimal place.
This is the smallest unit by which the prices for the currency pair may vary and is known as the basis point or more popularly as "pips".
Pip stands for percentage in point. In this case, the pip is equivalent to a hundredth of one percent.
The Japanese Yen (JPY) is an exception - it is quoted only to the second decimal point.
In order to calculate the pip value or how much is one pip, some additional information is needed, such as: trading size, leverage used, and the actual rate of the pair for which you want to calculate the pip value.
Have you heard of "fractional pips"?
Many currency pairs which have earlier been 4 decimal places are now sometimes being quoted out to 5 decimal places and the pairs which have former been quoted to 2 decimal places are quoted out to 3 decimal places.
The reason is that new electronic platforms have entered the forex market and price competition has become greater. Some platforms therefore have added an additional decimal place to their quotes.
Fractional pip pricing is reducing bid-ask spreads for the more popular currency pairs. With the additional decimal place, there is a more accurate and usually tighter spread. You can with fractional pips take advantage of the smallest price movements and with tighter spreads transactions costs therefore are kept at minimum.