Forex Converter & Forex Quotes

It is important to know the pip value for a particular contract size to be able to determine your profit when you are engaged in online forex trading. Online forex trading allows a person with a computer that is linked to the Internet to buy or sell currencies and make a profit (or loss) in the process. This is made possible by buying a currency that the trader predicts to increase in value compared to another currency. For example, if he expects the value of the Japanese yen to increase or strengthen against the U.S. dollar, he simply buys a certain amount of Japanese yen with his dollars and waits. After the price of the yen has increased relative to the dollar, he then makes a profit by selling the yen.

To indicate profit, forex traders usually focus on pips. Pip is an abbreviation for percentage increment point and this is the smallest increment by which the quoted price for a currency pair can change. For example, for the currency pairs, EUR/USD, USD/CHF and GBP/USD, the quote is usually expressed up to four decimal places. For example, EUR/USD = 1.2567 may be quoted as the amount in U.S. dollars that you will have to pay to get one euro. However, when the Japanese yen is involved, the quote has only two decimal places. For example, USD/JPY = 109.45 means that you will need 109.45 yen to buy one U.S. dollar.

Meanwhile, there are three contract sizes when you are dealing with forex transactions. A standard contract is 100,000 of the base currency, a mini-contract is 10,000 of the base currency, and a micro-contract is 1,000 of the base currency. Therefore, if you are trading in EUR/USD, you must have 1,000 euros if you want a micro-contract.

For currency pairs in which the U.S. dollar is the quote currency and the contract size is standard or 100,000, a gain of one pip will always mean that you will have a profit of $10. Let us take an example to see how this works. For example, if the quote for EUR/USD is 1.2567, this means that for a standard contract size, 100,000 euros will be equivalent to $ 125,670 dollars. An increase in the value by one pip means that EUR/USD will become 1.2568 or 100,000 euros will be equivalent to $125,680. It can be seen that your money has increased by $10 as a result of a gain of one pip for a standard contract size. If the contract size is a mini-contract, the value of a pip will be $1, while a micro-contract will mean that one pip is 10 cents.

For currency pairs in which the U.S. dollar is the base currency, the pip value will not be exactly $10 for the standard contract size. Instead, it will be 10 units of the quote currency. For example, if the quote for USD/EUR is 0.7957 and this increases by one pip to 0.7958, your profit for a standard contact size will be 10 euros or $12.57.