Unbiased Forex Broker Experts

Part III. Fractions of the quote rate

Fractions of quote rate - Forex School

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”.

Fractional pip is called pipette - Forex School
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.

Commander in Pips: Have you ever thought about pip value? For example, is there some difference between 1 pip rate change of EUR/USD pair, or, for example, USD/CHF pair?

Pipruit: Hm, I can’t say definitely, but I have some feelings that it isn’t quite the same. I can’t explain it yet, just have a sense. Besides, the term “pip value” is too vague. For example, I can ask “In what currency?​

Commander in Pips: You are absolutely right. The number of pips is only a half of the job. So let’s check it on an actual example:

Algorithm for pip value calculation

1. You should determine in what currency would like to estimate the pip value.

2. If currency that you’ve chosen for estimation of pip value coincides with quote currency (that comes after the slash”/”) in any pair, then the pip value will be always 0.0001 or 0.01 for JPY! 

For example, the pip value in USD for such pairs as AUD/USD, EUR/USD, GBP/USD, NZD/USD “ANY”/USD will be always 0.0001 or 10$ per each standard lot of 100 000 currency units (100 000* 0.0001). 

So the same is for JPY. If your chosen currency is JPY, then the pip value for USD/JPY, EUR/JPY, GBP/JPY “ANY”/JPY always will be 0.01!

3. If currency that you’ve chosen for estimation of pip value coincides with Base currency (that stands before slash”/”) in any pair, then the pip value will be always = pip/exchange rate.

Assume that you would like to calculate pip value in USD/CHF pair and current rate is 1.0782.

Calculate the pip value in USD: pip/exchange rate or 0.0001/1.0782 = 0.000 092. What does it mean in general? It means that 1 pip value in CHF = 10 CHF per 100 000 units of base currency, or 9.20 USD.

Pipruit: All right! I think I’ve got it!​

Commander in Pips: Fine, now it is your turn to calculate. Here is the task for you:

TASK #1

Estimate the pip value in GBP if EUR/CHF rate is 1.5315 for 10 000 units of base currency (0.1 standard lot). Also take into consideration that the EUR/GBP rate is 0.8415.

Pipruit: Ok, let’s see… Wait a minute GBP neither Base nor Quote currency for EUR/CHF. What should I do then?​

Commander in Pips: May be you should think about the second condition – The EUR/GBP rate is 0.8415. What is that for?

Pipruit: Hm…​

Commander in Pips: Ok, I’ll give you a small clue - if we have EUR/USD rate and USD/CHF, how we can calculate EUR/CHF rate?

Pipruit: Oh, that’s not so hard: EUR/USD* USD/CHF = EUR/CHF​

Commander in Pips: And if we have EUR/USD and EUR/JPY, how we can calculate USD/JPY?

Pipruit: I suppose (EUR/USD)/(EUR/JPY)…. No, in this case we will get JPY/USD and we need USD/JPY. It should be done vice versa – (EUR/JPY)/ (EUR/USD) = USD/JPY.​

Commander in Pips: That’s it. Now try to solve the task…

Pipruit: Ok... from the first EUR/CHF rate, we can estimate the pip value in EUR, it will be 0.0001/1.5315 = 0.000065 or 0.65 EUR per 0.1 lot of base currency. Oh, and now we just can convert EUR to GBP at the exchange rate. As it appears, it’s quite simple:

0.000065*0.8415 = 0.000 055 or 0.55 GBP. The answer is 1 pip value in EUR/CHF equals to 0.55 GBP if all other conditions hold (rates, lot size).

But Sir, if the pip value depends on the rate, does it mean that it will be different at different rates?​

Commander in Pips: Sure, because if the Quote currency increases in value, then the value of a pip also increases. It’s fair, because rate becomes higher, so the pip value also becomes higher. To explain that – let’s get to the last task for today:

Estimate the pip value for USD/CHF in terms of USD, if rate is 0.9500; 1.0000 ; 1.0500.

Pipruit: Well, it’s an easy task:

- for 0.95 pip value equals 0.0001/0.9500 = 0.000 105;

- for 1.00 pip value equals 0.0001/1.0000 = 0.0001;

- for 1.0500 pip value equals 0.0001/1.0500 = 0.000 095.

Oh, it looks like I understand! When rate is 0.95 and below the parity (1.00), it means that CHF is more expensive than USD, USD in turn – cheaper. Sense, CHF pip value is greater in terms of USD. At parity they are equal. When rate is above the parity, say 1.0500, It means that each dollar costs 1.05 Swiss Francs and the pip value in dollar is smaller, because dollar itself is more expensive than the Swiss franc. Sounds too confusing and messy.​

Commander in Pips: You’ve said everything correctly, but I would like to organize it in a more simple way, if you don’t mind.
Pipruit:Sure, go ahead.​

Commander in Pips: Pip value in terms of Base currency will become greater the exchange rate gets lower. Consequently, pip value will become lower as the exchange rate becomes higher.

Pipruit: Cool!

But, Sir, Will I have to do all these calculations every time when I enter or exit the trade on FOREX? ​

Commander in Pips: No. I can say even more. You will never have to do this manually. Ha-ha-ha… Because modern trading terminals do this automatically and in a fraction of a second.

Pipruit: What the deuce…​

Commander in Pips: Your disappointments are in vain, because you need to know how to do it anyway. This skill is irreplaceable, and you may need it in different tasks. For example, if you will build your own trading systems and experts.

Pipruit: Well, thanks then.​

Comments

Rens
4 years ago,
Registered user
Confusion

My reasoning in the question posed by me, was wrong on all accounts and I just figured out why that was myself. So I got rid of my question in this post, since it might lead to confusion for others reading my actual post.
Pavel T
4 years ago,
Registered user
That was a bit confusing, good job explaining all that!
Anthony23
a year ago,
Registered user
It's quite interesting of course. I got a whole lot out of these dialogues. THank you =)

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