The acronym pip expands to form ‘percentage in point’. It is the smallest increment that a given exchange rate can make. Most currency pairs are priced to four decimal points, except the Japanese yen, so the smallest change in the last decimal point is one basis point. If calculated, this tallies up to 1/100th of one percent. This may seem like a very small fraction of the worth of the currency but it is an indication of how the currency trend will be. Pips history is closely observed by those who trade in foreign exchange an s a predicting factor to the rise or fall of major currencies.
For example, if one were to take the smallest possible jump between two currencies, it would amount to $0.0001, or one basis or pip point. Technically speaking the smallest move does not need to be equal to one basis point but this is generally assumed so with most major currency pairs. All major market prices are quoted to the fourth decimal point. If an apple were to cost $1.20 in a shop, this would in forex terms be represented as 1.2000.If the price rises to 1.2005, it is said to have risen five pips. This will be noted in the pips history. People who are in the investment market for currencies as it is an indicator of one currency’s worth against another keenly observe the pips history. The major currencies today are the U.S.dollar, the Japanese yen, the euro, the British pound and the Canadian dollar.
The Japanese yen has never had a revaluation done since the Second World War and hence has only two decimal points. The yen is now valued at approximately U.S.0.08 so in the USD/JPY pair the pips history will reflect only two decimal points. This can be read as 1/100th of a yen as opposed to 1/1000th of a stronger currency. A currency pair such as EUR/ USD means a euro and a US dollar currency pair. The Euro is the first currency and represents the base currency and the US dollar being the second mentioned currency will be the quote currency. Therefore, to buy one euro in USD at the rate of 1.1200 in a market for a 100, 00 euros would total it up to$ 112,000 for a 100, 000 euros.
The time of transactions
To get the value of one pip in a currency pair, an investor has to divide one pip in decimal form (i.e. 0.0001) by the current exchange rate, and then multiply it by the notional amount of the trade. The value of pips between currency pairs is always different because of the difference in exchange rates. Sometimes however the US dollar is quoted as the quote currency and then for an assumed amount of 100,000 currency units, the pip value is assumed to be $10.This is reflected in the pips history at the time of transactions.
Pips are an indicator of the market swings in the volatile forex trade and pips history gives salient clues as to the trends in rates between currencies.