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Chapter 5, Part III. Fractions of the quote rate.

Discussion in 'Complete Trading Education- Forex Military School' started by Administrator, Apr 14, 2011.

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  1. Administrator

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    Part III. Fractions of the quote rate [​IMG]
    Commander in Pips: Ok, son, let’s continue with math. But before, I want to ask you – what do you know about the minimum fraction of a rate quote on FOREX?

    Pipruit: Well, every quote that we’ve discussed previously has 4 decimal places. So, I suppose that it’s 0.0001.​

    Commander in Pips: Well, in general, you’re right – 0.0001 is a most common minimum fraction of rate and it is called a “pip”. Can you tell me, what move has happen in terms of pips if EUR/USD rate has increased from 1.3325 to 1.3383?

    Pipruit: Let’s see – (1.3383-1.3325) =0.0058 or 58 pips (0.0058/0.0001) increase.​

    Commander in Pips: Ok. Sometimes 100 pips calls as “Figure”, but this term is not widespread enough. Anyway if you see it somewhere in application to quote discussion, then you will know what it means.

    Pipruit: But Commander, how we could deal with USD/JPY quoting? This quote has only 2 digits after the dot, for example 90.38?​

    Commander in Pips: Good question, son. The point is that JPY quotes as 1 USD per 100 Yen, and not per 1 Yen. That’s why its quote has only two decimal places. So, you can see also that other pairs that have JPY as a quote currency also only have 2 decimal places. So, the most common quoting system assumes using 4 decimals or 2 decimals, as in case with JPY.

    But also we should note here that during recent times the rivalry amongst FX brokers has increased significantly. This, in turn, leads to tighter Bid/Ask spreads – we’ve already talked about this. But more and more brokers have also turned to 5 decimal place quoting and 3 decimal place quoting. In other words they add an additional digit to the quote. In this case you can see, for example, a GBP/USD quote as 1.54687 and GBP/JPY as, say, 130.781. It means that these FX brokers quote fractional pips that some brokers call a “Pipette”.

    [​IMG]

    Now tell me, if the AUD/USD rate will change from 0.99383 to 0.99388, how much will the change be in pipettes?

    Pipruit: 0.99388-0.99383 = 0.00 005 or 0.00 005/0.00 001 = 5 pipettes.​

    Commander in Pips: And how many pipettes in single pip?

    Pipruit: 10, I suppose.​

    Commander in Pips: Correct! Now let’s go further.
     
    #1 Administrator, Apr 14, 2011
    Lasted edited by : Mar 3, 2013
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