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Lesson 7: An Explanation of Pips and Fractional Pips

Lesson 7: An Explanation of Pips and Fractional Pips

In our last lesson we learned about the different position sizing options available to retail forex traders. In today's lesson we are going to continue our forex trading course with a look at what pips and fractional pips are.

Traditionally a 1 pip move in the market was the smallest move that a currency could make. Another way of looking at this is that a 1 pip move in the market is a move up or down by 1 of the number sitting the furthest to the right of the decimal point in the forex quote.

As most currency pairs have 4 decimal places a 1 pip move in the market would be a move up or down by 1 of the number sitting in the 4th decimal place spot in the quote. So for example the EUR/USD currency pair is trading at 1.5678 as of this lesson so a move to 1.5679 would be a 1 pip increase in the quote and a move to 1.5677 would be a 1 pip decrease.

In the JPY based currency pairs where there are two decimal points, a 1 pip move in the market would be a move up or down by 1 of the number sitting in the second decimal point spot. So for example as of this lesson USD/JPY is currently trading at 101.28. With this in mind a move to 101.29 would be a 1 pip move up in the market and a move to 101.27 would be a 1 pip move down in the market.

If you noticed at the beginning of this lesson I said that a 1 pip move in a currency pair has traditionally been the smallest move that a currency pair could make. I say this because as electronic platforms have brought greater price transparency to the forex market and price competition has heated up some platform including the one that we have been using have added an additional decimal place to their quotes. Known as Fractional pips, now many of the currency pairs which have traditionally been 4 decimal places quoted out to 5 decimal places and the pairs which have traditionally been quoted out to 2 decimal places quoted out to 3 decimal places.

Lets quickly login to our demo trading platforms to see what I am talking about. If you have not done so already I encourage you to pause this video now and click the demo registration link above this video if you are watching on or to the right of this video if you are watching on Youtube.

Once logged into your demo trading platform you can see this extra digit in the upper right hand corner of the quote for each currency pair. Fractional pip pricing is an advantage to the individual trader as it allows the market maker to quote in increments of less than 1 pip, offering for example a spread of 2.5 pips on EUR/USD instead of 3 and saving the trader a half a pip on the trade.

Thats our lesson for today, in tomorrow's lesson we will look at how to calculate profits and losses in the forex market so we hope to see you in that lesson.




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