What is the base point

1. What is a PIP?
A basis point is the smallest unit in forex trading. In currency pairs other than the Japanese yen, 1 point is the fourth decimal point in the exchange rate. In all currency pairs involving the yen, 1 dot is the second decimal place.

On many electronic trading platforms, the price of each currency pair is accurate to a tenth of a point; More accurate prices narrow the difference between buying and selling currencies. This is good news for you if you are a trader, as the spread is also part of your trading costs or profits.

2. Foreign exchange basis calculation
As mentioned earlier, 1 point is the fourth decimal point in the exchange rate; The yen pair is the second decimal place. Taking EUR/USD as an example, if EUR/USD falls from 1.1460 to 1.1400, we can state that EUR/USD has fallen by 60 points; If the pair rises from 1.1460 to 1.1500, it represents an increase of 40 points in EUR/USD. If USD/JPY rises from 112.50 to 112.98, it represents a rise of 48 points.

In forex, basis points are often used to calculate profits and losses. The foreign exchange market deals on a lot or contract basis; Different trading platforms have different rules for the currency units included in a contract. Taking the IG trading platform as an example, 1 mini contract is 10,000 currency units (magnifies the exchange rate change by 10,000 times), that is, we commonly know as 0.1 lot, each change of 1 point is equal to a change of 1 currency unit (i.e. 0.0001*10000=1). If your account is settled in dollars, each point is worth about $1.

3. Forex base point example: EUR/USD
Having covered basis points and how to calculate the movement of a currency pair, we will now add the concept of settlement currency to further understand forex trading. (Take IG trading platform as an example)

If our trading account is settled in dollars, we gain or lose $1 every time EUR/USD rises or falls 1 point. Suppose we entered at 1.1460 to short EUR/USD for 2 mini-contracts, and after the exchange rate fell to 1.1360, we would make a profit of 100 points per contract, a total profit of 200 points (200=100*2), and in the mini-contract, the value of 1 point is about 1 dollar, we would make a profit of 200 dollars.

Conversely, if the trading account is denominated in euros, we need to convert that dollar into euros. At the time of our exit, the exchange rate of EUR/USD was 1.1360, that is, 1 EUR =1.1360 USD, we need to divide 1 by 1.1360 to get 1 USD =0.8803 EUR; So, if the euro were our unit of account, every time the euro/dollar rose or fell by 1 point, we would make a profit or loss of 0.8803 euros. In the example in the previous paragraph, we would make 176.06 euros (176.06=200*0.8803).

4. Forex base point example: GBP/JPY
Let's use the GBP/JPY example again to calculate the value of a basis point. Assuming the total number of trades is 1 mini lot, we enter short GBP/JPY at 146.45 and then exit at 144.95 with a loss of 150 points.

If our trading account is settled in dollars, and 1 dot is worth about $1, then we have made $150 on this trade.

If our trading account is settled in Japanese yen, the USD/JPY exchange rate will be 111.200 at the time of our closing, that is, 1 USD =111.200 JPY; So then we made 16,680 (16,680 =150*111.20) yen on this trade.

Summary: In Forex trading, being aware of changes in forex basis points will help you manage your risk-return ratio. Since different trading platforms have different regulations for 1 contract /1 lot, it is recommended that investors conduct simulation trading on the platform before actual trading.