Understanding Pips And Calculating that Value

Every currency pair has a corresponding value and hence a quote. For example, a GBP/USD quote could be 1.5776. This means that the exchange rate for every GBP is USD 1.5776. In other words, it would cost the trader USD 1.5776 to buy a single GBP. A pip is the smallest price change that a given exchange rate can make.

In our example a move from 1.5776 to 1.5777 would indicate a 1 pip increase. Since most major currency pairs (but not all, example of an important exception is the USD/JPY pair) are priced to four decimal places (.0000), the smallest change is obviously that of the last decimal point, or one basis point.

Several pro’s and con’s for the individual trader

Pro's:1. The trader can respond to currency moves caused by economic, social and political events at the time they occur. This is a huge advantage the forex market has over any other markets. If a company listed on the NYSE is scheduled to release quarterly earnings after the close of the market (as they almost always do), owners of the stock cannot react to the data (since there is no after hours trading) and may suffer
huge losses depending if they are short or long the stock once the market opens again the day after.

2. A trader has the opportunity to have an active market no matter what part of the world he or she lives in. As an example, if someone living in Australia would like to trade the US stock market they would have to be awake all night because of the time differences. Not so with the FX market.