I have a couple of questions which I feel are very basic but would be great if you could clarify.
I think I am just confusing myself and need it clarifying. Any sources which I could use to aide my
understanding would be great.
1 basis point = 0.01 and 1 pip (in most ccypairs) is = to 0.0001. So, are 100 pips = 1 bp?
How do I also calculate the value of 1 pip in different currencies? i.e. how much is 1bp in EURUSD
worth in terms of pips?
Something else that confuses me is buy/sell side. Is buy always referred to as bid and sell always referred to as offer? So left hand side EURUSD would be person X selling EURs buying USD, so they are hitting the ask price?
When calculating a rate - do you always minus for sell side and add for buy side?
ie. if I wanted to build in 60bps to 8.1892 rate, where I am selling EURs and buying SEK. What would
be the calculation for the final rate?
I suggest that you [B]not[/B] try to apply the concept of basis points to the price of currency pairs in the forex market.
(Refer to this post from John Forman, screen-name [I]Rhodytrader[/I] — 301 Moved Permanently)
You will never hear forex traders talk about price moves in terms of basis points. We measure price moves in pips, and tenths of a pip. (Most people use the informal term “pipette” to designate 1/10 of a pip.)
Currency pair prices can be quoted in 4 or 5 decimal places. Consider a price in 4 decimal places: If the price of a currency pair is, say, 1.4567, then the 4th decimal place represents 7 pips, the 3rd and 4th decimal places taken together represent 67 pips, and the 2nd, 3rd and 4th decimal places taken together represent 567 pips.
Now consider a price quoted in 5 decimal places: If the price of a currency pair is, say, 1.45678, then the 5th decimal place represents 8/10 of a pip (0.8 pip). So, in this case, the 2nd, 3rd, 4th and 5th decimal places taken together represent 567.8 pips.
In all currency pairs except the Japanese yen pairs, one pip is one ten-thousandth of one unit of the cross-currency in the pair. In yen pairs, the JPY is always the cross-currency (never the base currency), and one pip in any yen pair is 1/100 of one yen. (The cross-currency can also be referred to as the quote currency.)
So, in the case of the XXX/USD pair for example (where XXX can be any currency other than USD), one pip is 1/10,000 of one U.S. dollar, because USD is the cross currency. In the case of USD/CHF, on the other hand, one pip is 1/10,000 of one Swiss franc, because CHF is the cross-currency.
In the case of the XXX/JPY (where XXX can be any currency other than JPY), one pip is 1/100 of one Japanese yen.
Obviously, in terms of value, all pips are not equal, because different pairs can have different cross-currencies. One pip in the EUR/USD pair does not have the same value as one pip in the USD/JPY pair.
So far, this discussion has dealt only with pip values [B]per unit[/B] of currency. As an example, a price such as EUR/USD = 1.3657 (which literally means that €1 = $1.3657 at the present moment), tells us that one pip is 1/10,000 of one dollar.
But, forex traders trade in [B]lots[/B] of various sizes: 1 standard lot = 100,000 units of the base currency; 1 mini-lot = 10,000 units of the base currency; 1 micro-lot = 1,000 units of the base currency; etc.
So, generally, when forex traders refer to pip values, they mean the value of a 1-pip price move for a particular pair, for a given lot size, and for a given account currency.
If you have an account denominated in XXX, and you trade one mini-lot of YYY/ZZZ in this account, the value of a 1-pip price move in this trade will depend of 4 factors: B[/B] the cross-currency of the pair traded (ZZZ, in this example), B[/B] the position size traded (1 mini-lot, in this example), B[/B] the currency in which your account is denominated (XXX, in this example) and B[/B] the current value (price) of the cross-currency in terms of your account currency (the price of ZZZ in terms of XXX, in this example).
To learn how pip values can be calculated by hand, or determined using a Pip Value Calculator, refer to this post.
It contains links to several other posts on the subject of pip values, and those other posts will help you, as well.
Buy and sell are [B]erroneous terms[/B] meaning “take a LONG position”, and “take a SHORT position”, respectively. We are stuck with those erroneous terms — we will never rid the forex world of those terms — but, understand that there is no buying or selling of currencies or currency pairs in the retail forex market (our market). For more on this subject, refer to [B]the links[/B] in this post.
“Buying” (meaning going LONG) and “selling” (meaning going SHORT) are things that [B]you[/B] do.
Establishing a BID price and an ASK price are things that [B]your retail broker[/B] does. He is the market maker that you are dealing with. He maintains two continuous price streams for each currency pair: his BID price, and his ASK price.
These are “take-it-or-leave-it” prices. In other words, if you want to “buy”, you have to do so at your broker’s ASK price (not at some price that you make up), because his ASK price is what he is willing to “sell” for. And if you want to “sell”, you have to do so at your broker’s BID price, because that’s the price at which he is willing “buy” from you.
Again, forget basis points. Think in terms of pips.
Generally, forex traders watch [B]one[/B] of their broker’s two price feeds — either the BID price, or the ASK price. Most traders watch the BID price.
The BID price you see on your chart, or in your platform, is the price at which you can “sell” (meaning go SHORT), without factoring in the spread.
If you are looking at that same BID price chart, and you are considering where to close your SHORT position (by “buying”, meaning going LONG), you have to factor in the spread.
As an example, if you are trading off of a BID price chart, and if you are SHORT a particular pair, and you determine a probable support level below the current price (on your BID price chart), you have to take account of the fact that in order to exit your trade when the BID price hits that support level, you will have to “buy” at the ASK price — which is the BID price [B]plus[/B] the spread.
Notice that the ASK price is always higher than the BID price, and therefore, you always [B]add[/B] the spread to the BID price in order to get the ASK price.