Forex Basis Points: Understanding Pips & Calculation

2023-08-03
Summary:

In forex trading, traders usually formulate trading strategies and conduct trading operations based on basis points. The use of base points helps us more accurately measure and represent changes in exchange rates.

For forex basis points, commonly referred to as "pips" (in English, pips), the minimum unit of exchange rate change is 1 basis point, which is the change of the last digit in the exchange rate. Each change of 1 unit is called a change of one forex basis point. For example, if the exchange rate of EUR/USD changes from 1.2160 to 1.2161, then the EUR/USD exchange rate has increased by 1 basis point. Except that the yen exchange rate is 1 basis point in the second place after the Decimal separator (for example, if the USD/JPY exchange rate changes from 116.30 to 116.29, then the USD/JPY exchange rate drops 1 basis point), the exchange rate of other currencies is calculated based on the fourth place after the Decimal separator.

Foreign exchange basis point

It is worth noting that according to market practice, the bid price of the forex rate is usually composed of Significant figures containing "4" and "2" digits after the Decimal separator. However, in recent years, many forex dealers have introduced the bid price representation of the forex rate containing "5" and "3" digits after the Decimal separator. The "5" and "3" after the Decimal separator are called fractional pips, that is, one tenth of the forex base point. For example, if the exchange rate of EUR/USD changes from 1.21600 to 1.21601, then the EUR/USD exchange rate has increased by 1 percentage point.


To know how to make money by investing in forex, one must learn how to calculate the basis point value of forex. Below are some examples to illustrate.

1. When the US dollar and USD are used as the base currencies in a currency pair, the calculation formula for one forex basis point is as follows:

Forex basis point value =. 0001 ÷ currency to exchange rate

For example, if the USD/CHF exchange rate is 1.2020, then the one basis point value of the USD/CHF currency pair is 0001 ÷ 1.2020 = 0.000819

The USD/JPY exchange rate is 123.15, so the one basis point value of the USD/JPY currency pair is 01 ÷ 123.15 = 0.000812.


2. When the US dollar is used as the relative currency in a currency pair, such as AUD/USD or GBP/USD, The 1 basis point value of EUR/USD is approximately 0.0001.


We usually do not need to calculate this forex basis point value, as all forex traders will help you calculate it. However, knowing the calculation method of forex basis points is always invaluable.


Disclaimer: Investment involves risk. The content of this article is not an investment advice and does not constitute any offer or solicitation to offer or recommendation of any investment product.

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Risk Warning: Trading Contracts for Difference (CFDs) are complex financial instruments and come with a high risk of losing money rapidly due to leverage. Trade on margin carries a high level of risk and may not be suitable for all investors. Before deciding to trade Forex and CFDs, you should carefully consider your trading objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial trading capital. We recommend that you seek independent advice and ensure you fully understand the risks involved before making any investment decision. Please read the relevant risk disclosure statements carefully before trading.
EBC Financial Group is a co-brand shared by a group of entities including:
EBC Financial Group (SVG) LLC is authorized by the St.Vincent and the Grenadines Financial Services Authority(SVGFSA),and the company registration number is 353 LLC 2020. with registered address at Euro House, Richmond Hill Road, Kingstown, VC0100, St. Vincent and the Grenadines.
Other Relevant Entities
EBC Financial Group (UK) Limited is authorised and regulated by the Financial Conduct Authority. Reference Number: 927552. Website: www.ebcfin.co.uk
EBC Financial Group (Australia) Pty Ltd (ACN: 619 073 237) is authorised and regulated by the Australian Securities and Investments Commission (Number: 500991). EBC Financial Group (Australia) Pty Ltd is a related entity of EBC Financial Group (SVG) LLC and are managed separately. EBC Financial Group (Australia) Pty Ltd provides general financial advise services in Australia.
EBC Financial Group (Cayman) Limited is licensed and regulated by the Cayman Islands Monetary Authority (Number: 2038223). Website: www.ebcgroup.ky
Business Address: The Leadenhall Building, 122 Leadenhall Street, London, United Kingdom, EC3V 4AB. Email Address : [email protected]. Telephone : +44 20 3376 9662
Disclaimer: EBC Financial Group explicitly does not participate in any cryptocurrency activities or offer Crypto Contracts for Difference (CFDs). Our financial services solely pertain to traditional instruments. Clients are advised that any references to crypto-related services using the EBC name are inaccurate and unauthorized. Any reference to past performance is not indicative of future performance. The information contained in this website is provided for reference only and does not constitute any investment advice.
Regional Restrictions: EBC does not offer any services to citizens and residents of certain jurisdictions including: Afghanistan, Belarus, Burma (Myanmar), Canada, Central African Republic, Congo, Cuba, Democratic Republic of the Congo, Eritrea, Haiti, Iran, Iraq, Lebanon, Libya, Malaysia, Mali, North Korea (Democratic People's Republic of Korea), Russia, Somalia, Sudan, South Sudan, Syria, Ukraine (including Crimea, Donetsk, and Luhansk Regions), the United States, Venezuela, and Yemen. For more information, please check out our FAQs.
Compliance Disclosure：The website can be accessed globally and is not specific to any entity. Your actual rights and obligations will be determined based on the entity and jurisdiction that you choose to be regulated.There may be local laws and regulations which prohibit or limit your rights to access, download, distribute, disseminate, share or otherwise use any or all of the documents and information published on this website.
Risk Warning: Trading Contracts for Difference (CFDs) are complex financial instruments and come with a high risk of losing money rapidly due to leverage. Trade on margin carries a high level of risk and may not be suitable for all investors. Before deciding to trade Forex and CFDs, you should carefully consider your trading objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial trading capital. We recommend that you seek independent advice and ensure you fully understand the risks involved before making any investment decision. Please read the relevant risk disclosure statements carefully before trading.
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