David Waring

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 InformedTrades.com 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. As always if you have any questions or comments please leave them in the comments section below, and have a great day!

Thank

 

Unregistered

This video is not working - I can obviously read the text, but I just thought I would let you know. Great site. Thanks.

David Waring

Thanks for the heads up, this has been fixed. Please let me know if you notice anything else.

Best Regards,
Dave

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Unregistered

Hi the video for this specific lesson isn't working. Thanks

David Waring

should be working now if you refresh the page. Thanks for the heads up.

Best Regards,
Dave

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Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

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iridium

Hi David ..by the way I love your videos and your deliberate fragmentation of forex concepts.which makes it easier to assimilate and understand. I am a teacher by profession ..am teaching Math and Physics and I also teach concepts in small doses..... and by strange coincidence I chose the FXCM and their platform just serves me fine . I tried others like MetaTrader on FXsolution and it was very complicated and far above my IQ...LOL OK .. Here is the question ?? Since pips and fraction of them 1/10 of a pip fluctuate so rapidly. what spread do I pay to the broker..in my case FXCM ? Is it the spread at the time of my mouse click or the spread at the time of the execution by FXCM.?
Also while I am at it .. when my trade closes for what ever reason my total spread owed to FXCM is a sum of opening spread and closing spread. True or False or non of the above..

Iridum

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Tekmnd

Hi again Iridium,

"when my trade closes for what ever reason my total spread owed to FXCM is a sum of opening spread and closing spread"

You don't owe at the close of the trade. The spread is the difference between the largest amount a buyer is willing to pay, compared to the smallest amount a seller is will to sell at. So really, each currency pair has 2 prices at any given time- the price you will pay to buy, and the price someone else will pay you if you sell.

When you buy, you pay the higher of the 2 prices. When you sell, you get the lower of the 2 prices.

So let's say a pair has a bid of 1.4000, and an ask of 1.4002. If you buy, you will pay 1.4002. If you sell, you will get 1.4000. Let's say you bought at 1.4002. Immediately your profit/loss will show you down 2 pips, because if you immediately sold, you would only get 1.4000. For more on this, see Dave's video on bid/ask-
Forex Trading - Understanding the Bid/Ask Spread

You get the spread at the point of execution by FXCM. The spread can vary a little at volatile times. Also, different currency pairs have different spreads, with some being quite larger than others.

I would also recommend signing up for a demo account at a broker such as FXCM to practice all of this. It's free and works just like a real account, except it doesn't come with the physcological stress of risking real money lol.

Cheers
Tek

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David Waring

Hi Iridium,

To add to what Tek has said here the spread you pay is where the trade is executed by the broker.

Best Regards,
Dave

__________________
InformedTrades University | IT Shopping Guide | Site Map


Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Thank

 

stocknovice

Hi Guys,

I'm confused regarding fractional pips lets say the spread between the EURO/USD was 1.30000/1.30013 for spread of 1.3 pips would it be rounded to 1.0 or 1.5...also if the spread was 1.7 would it be rounded off to 1.5 or 2.0..

Thanks

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Simit Patel

hi stocknovice,

the fractions don't get rounded; you simply receive or pay the amount of the fraction. for instance, if you are trading $100,000 of EURUSD, 1 pip will be worth $10. so, 1.7 pips will be worth $17. likewise, if you are trading in increments of 10,000 on EURUSD, 1 pip will be worth $1, and 1.7 pips will be worth $1.70. 1.3 pips will be worth $1.30, and so on.

as such, fractional pips just allow for more precise pricing.

hope that helps
simit

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