Fluctuation and PIPS
When observing a currency table on any trading platform, one will see that the price of the various currencies tend to jump up and down- fluctuate.
The smallest movement of a currency pair is called a PIP (Percentage In Point)
For example, if the EUR/USD pair rises from 1.3245 to 1.3246, then in trading terms the movement is classed as a “1 PIP movement”.
Question - If the same currency rises from 1.3245 to 1.3250 then the currency pair has risen by how many PIPS?
Answer = 5 PIPS
Question - If the GBP/USD currency pair rises from 1.2678 to 1.2778 then by how many PIPS has the currency moved?
Answer = 100 PIPS
Calculations
In the previous section we learnt that the slightest movement of a currency pair is classed as a PIP.
The value of a PIP will vary depending on the deal size or position size that is opened by the trader. Even though most trading platforms allow traders to customize their calculations in pre-determined currencies, this tutorial will explain the basic PIP calculations in USD.
To demonstrate these calculations the EUR/USD pair will be used.
Example:
EUR/USD – 1.3234
When opening a buy position of 1 lot ,or as often classed- a position size of 100,000, the trader is buying 100,000 Euros which is equivalent to 132,340 Dollars. A trader doing so is generally assuming that the currency pair is going to go up in value otherwise he/she wouldn’t have bought Euros, or in trading terms gone LONG.
If the pairs' value rise by 1 pip the same amount of Euros in Dollar value are now worth 132,350.
Let’s see why ?
100,000 X 1.3234 = 132,340 Dollars
100,000 X 1.3235 = 132,350 Dollars
When subtracting one from another, one can see that the position is in a profit of $10.
$132,350- $132,340= $10
Conclusion on the EUR/USD currency pair, when opening a 100,000 trading position each PIP is worth $10.
