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A pip or a point
In foreign exchange, the investor is trading one currency against another. This results in an exchange rate.
For example, the exchange rate for the Euro against the United States Dollar at the time of writing is EURUSD 1.0240. This means that I can exchange a Euro for 1.024 US dollars. Conversely, if I wanted to exchange 1 US Dollar for Euros, I would get 0.9765 US Dollars (1 divided by 1.0240).
All currency pairs or crosses are quoted to the 4th decimal point. If the price in EURUSD moved from 1.0240 to 1.0241, it would have moved 1 pip or 1 point.
What is a 20 pip move in EURUSD worth?
This all depends on if we are looking at a physical exchange or a spread bet.
Physical Exchange
In this example we are going to physically exchange one thousand US dollars into Euros. We will take the exchange rates at 1.0240 and 1.0260, a move of 20 pips.
Exchanging $1000 at 1.0240 would result in us receiving 1024.00 Euros.
Exchanging $1000 at 1.0260 would result in us receiving 1026.00 Euros. A gain of 2 Euros. The percentage gain is roughly 0.2%.
Spread Bet
In spread betting we are placing a trade through our broker on the underlying asset. The amount that we win, or lose, is dependent on the amount that we trade per ‘pip’. Buying EURUSD at 1.0240 in £10 a pip trade and closing at 1.0260 would result in a gain of £200. We have predicted the move correctly (£10 x 20 pips =£200).
Conversely, buying EURUSD at 1.0240 and closing at 1.0220 would result in the equivalent loss.
Figure 1 EURUSD 10/08/2022
Does 20 pips have the same value in all currency crosses?
If we are looking at spread betting, then yes. A 20 pip move in EURUSD is equivalent to a 20 pip move in GBPUSD if the trade size is the same. Afterall, spread betting is about the size of your bet so 20 pips is equal across all currency pairs if your bet size is the same.
Spread betting simplifies the approach to trading. It allows you to focus on the market of interest and whether it will be moving higher or lower.
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