In foreign exchange trading, a PIP stands for ‘Point In Percentage’ and is one of many fractions used to describe the value of a currency. In forex trading, it is common to use fractional amounts to make the figures more manageable. Using decimals or percentages can be much easier when calculating profits and losses.
PIPs are essential because they allow traders to measure their profits and losses accurately. In FX trading, you’re typically quoted prices to the nearest pip, so it’s essential to be aware of how much each pip is worth in your chosen currency pair.
PIPs are a popular way of describing changes in a currency’s worth as they avoid large, unwieldy figures. They also make it possible to easily compare one currency with another, which would otherwise be difficult due to their value differences.
For example, if two currencies were at parity (one equal dollar), an increase of 0.10% would mean that the more valuable of the two (in this case, the dollar) has increased in value by 0.0099 against the less valuable of the currencies. That same move on another currency would be much less impressive, an increase of only 0.0005, which is hardly worth writing about.
Different brokers and trading platforms will use slightly different PIP values, but standard practise is to multiply a PIP figure by 100 to remove the decimal point and add ‘points’ at the end for clarity, e.g. +1 = one point, +2 = two points etc. This means that when dealing with transactions and figures where PIPs are used, it can be imperative to check whether your broker calculates its PIP values in the usual way (multiply by 100 then add ‘points’) or whether they are using the system where PIPs are written with numerals after them, e.g. +1 = one pip, +2 = two pips etc.
Using points instead of multiplying by 100 can significantly affect your profits and losses, so checking your broker’s format is always essential when dealing with figures involving PIPs.
In Singapore, FX brokers typically quote prices to the nearest pip. This gives traders a clear understanding of their potential profits and losses before entering a trade. Mastering PIP values is an integral part of becoming a successful FX trader in Singapore. With practice, you’ll be able to judge market sentiment and make informed trading decisions that could lead to profitable trades.
There are some risks associated with using PIP in Singapore, both legal and moral risks that may arise for traders who use PIP when dealing with clients when setting prices for their trades.
The first example used is when the trader’s client is an un-sophisticated individual or company that does not know to check the PIP value when used. They will accept rates given by traders when they set their prices, but they are actually paying more than they should be for the trade.
This can occur in MTM (mark to market) reporting, where amounts due are recognised at current exchange rate values. However, this may not be suitable for clients who use funds that need to remain liquid, so they will incur debts if their assets are converted into another currency while remaining on margin during trades.
Another risk of using PIP is the false assumption that a more considerable PIP value reflects a higher chance of a country defaulting on its debts. The reality here is that this does not mean much if the PIP value is small and only affects a small portion of your portfolio for trades or sizing. Your chances of being right are still just as slim even though you have used a more significant number to reflect a higher chance.
For FX traders wanting to know what forex online trading is, and looking to use PIP in Singapore, we recommend contacting a reputable online broker from Saxo Bank.