Every currency pair is quoted by a certain number of digits following the decimal point. This is usually between 2 and 8 digits.
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Forex traders use the pip as the base measurement unit for distances between market prices. For most currency pairs, pips are quoted from the fourth digit following the decimal point. Currency pairs that have the Japanese yen (JPY) as one of the currencies in the pair do not follow the four-digit rule and instead count pips starting with two digits after the decimal point. Brokers will express the spread charged in the market for a currency pair in terms of pips.
For currency pairs, which are cited from the fourth digit following the decimal point, a pip is equivalent to dividing 0.0001 or 1/10,000 by the exchange rate. For instance, if the buy price for the GPB/USD currency pair is 1.3915 and the sell price is 1.3914, the spread would be quoted as 1 pip. Smaller spreads mean better pricing for traders which ultimately enhances profitability for trading activities.
For currency pairs that are cited to two digits after the decimal point, a single pip is equivalent to 1/100 divided by the market’s current rate of exchange. For example, assume the buy price for the USD/JPY currency pair is 108.85 and the sell price is currently 108.84, the spread charged by the broker is 1 pip.
Traders will oftentimes express the total profit or loss of a trade that has been closed in terms of pips. Basically, the Forex industry uses pips as a convenient method of expressing differences in value.
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