Introduction Series: Pips, Lots and Quotes

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What is a PIP?

A pip, short for “Percentage in point” is the smallest standardised unit in which a currency quote can move.

It is the most widely used term in forex trading because most traders measure their performance based on the number of pips that they manage to make in a certain period of time, although it actually isn’t the right way to measure the performance of any system.

Most new traders focus on pips and pips because that is what they have been hearing from all the online gurus that claim to be professional traders. 

To better understand what is a pip, let’s take USDCAD for example,

USDCAD current exchange rate

1.2089 -> 1.2090 = Increment of 1 pip

0.0001 = 1 pip

This is true for most currency pairs, but some have different numbers of decimals in their quotes. For instance, the USDJPY.

USDJPY current exchange rate

108.05 -> 108.06= Increment of 1 pip

Most brokers provide quotes with one additional decimal. The smallest change in a currency quote then becomes a point.

1 Pip = 10 Points

USDJPY
108.050 -> 108.051= Increment of 1 point (0.1 pip)

What do the currency quotes mean?

Currencies are traded in pairs. That is why each currency quote is made up of 2 currency pairs.

USD JPY

The currency in front is called the ‘base currency’ and the latter is the ‘quote currency’.

The exchange rate determines how much of quote currency can be exchanged with 1 unit of base currency. If that does not make sense to you now, don’t worry. Let’s jump back into our USDJPY example again! We like ninja! And if you don’t know what ninja means, go check out this article.

Say the current rate for USDJPY is 108.05, 1 USD can be exchanged for 108.05 JPY. When the market moves and the rate increases 1 pip to 108.06, 1 USD can now be exchanged for 108.06 JPY, which means the purchasing power of USD is now slightly stronger relative to JPY. 

In short, it shows the relative value of 2 currencies.

What is a LOT?

Lot is the most common unit of measurement for trading transactions in most retail brokers. 

For foreign exchange markets,

1 Lot = 100,000 Units of currency

When a trader buys 1 lot of EURUSD, 100,000 units of EUR is bought.

1 standard lot = 100,000 units

1 mini lot (0.1 standard lot) = 10,000 units

1 micro lot (0.01 standard lot)  = 1,000 units

The contract size differs across asset classes. Let’s take precious metals as an example;

1 lot of Gold is equivalent to 100 ounces of gold whereas 1 lot of Silver is equivalent to 5000 ounces of Silver. It could be different too for different brokers that you are trading with, and the above example is applicable for FXPIG.

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