Entering the world of Forex trading can be exciting and overwhelming due to its unique language and concepts. Among the essential terms traders need to understand are 'Pip' and 'Point.' These terms may seem complicated initially but don't worry. This guide is here to simplify them. We'll explain the differences and why they're essential for Forex traders.
What Is a Pip in Forex?
A 'Pip' in Forex trading is like a tiny step. It's short for 'Price Interest Point' and is the smallest change that can happen to an exchange rate. We usually see it in a currency pair's second or fourth decimal place. Let's use the currency pair EUR/USD as an example, which has a price of 1.0216. The '6' at the end is the Pip. So, when the EUR/USD price goes from 1.0216 to 1.0218, that's a movement of 2 Pips. If the price jumps to 1.0316, that's a big leap of 100 Pips.
What Is a Point in Forex?
Conversely, a 'Point' shows a small change but at the third or fifth decimal place in specific currency pairs. Using the EUR/USD pair again, if the price is 2.34340 and changes to 2.34349, this change is called a movement of 9 Points. In general Forex trading, especially in smaller accounts, people often use Pips more than Points.
What Is the Difference Between a Pip and a Point?
The difference between a Pip and a Point is about where they are. A Pip is at the second or fourth decimal place, while a Point is at the last decimal place. It's important to know that 1 Pip equals 10 Points. So, if the price of the EUR/USD pair changes from 2.34530 to 2.34540, this is a movement of 1 Pip or 10 Points.
In conclusion, Pip and Point both serve the same function of tracking monetary fluctuations. However, it is crucial to understand the differences between them in terms of decimal places. Traders can enhance their trading tactics by developing a thorough understanding of Pips and Points and appropriately interpreting cross-currency information.
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