By Sean Hyman Pips are often called the smallest increment of currency you can trade in Forex – technically four places beyond the decimal place for most currency pairs.

So if you’re already counting currency movements when they move just .0001, why would you need fractional pips anyway? Let me explain.

As I said, most currency pairs can easily be priced four digits past the decimal place. The only exemption is yen currency pairs. Yen crosses are only priced two places beyond the decimal place like the AUD/JPY, CAD/JPY, and EUR/JPY.

However, some Forex dealers (or “market makers”) add another digit onto their currency pairs (either a fifth or third digit depending on the pair). This extra digit is the fractional pip.

Fractional Pips = Less in Fees!

Why do the market makers do this? By allowing fractional pips, it allows the market makers to quote them and narrow the spread even further. (Remember: The spread is the difference between the buy and sell quote.)

This is good for you, because you pay your market maker (or Forex broker/dealer) the spread as their fee for each Forex trade you place.

After all, would you rather pay a spread of 2 pips or 1.7 pips for each trade? In plain English, that’s roughly US$2 for each mini-lot you trade vs. US$1.70.

Therefore, let’s say you’re trading 5 mini-lots of EUR/USD. In the first scenario, you’re paying roughly US$10 in spread costs. In the second scenario, I’m paying US$8.50 for the same exact trade. Personally I’ll take the second one!

Take a look at the screen shot at the right. As you can see, 1.3573 is the sell quote for this currency pair. That’s the full pip quote. However, this platform also lists an “8” to the right, indicating that’s 8/10ths of another pip. In other words, the “8” is the fractional pip.

Rookie Mistake: How Fractional Pips Can Confuse New Traders

A word of caution: Many new traders count that fifth digit as a whole pip. That’s a mistake. If you do that, you will make serious errors when calculating both your stop-loss and your profit targets.

For instance, say you want to set your stop-loss at 40 pips away from your entry price. But if you count that fifth digit (or third digit for yen crosses) fractional pip as a whole pip, then you’ll set your stop only 4 pips away from your entry point. Not good! Your stop-loss could be triggered mere seconds after you enter the trade, and you won’t have enough time to earn any profits.

The same goes for a profit target. Say you want to exit a trade when the pair jumps (or falls) 50 pips. If you’re mistakenly counting the fractional pip as a whole pip, then you could set your profit target a mere 5 pips away from your entry point.

In other words, your platform will close your trade when your currency pair is just starting to move in your favor and you’ll miss out on potential profits.

So what’s the lesson here? Yes, fractional pips can work in your favor as far as fees are concerned. It’s also good to understand to what they are so you know what you’re looking at on your currency quote screen.

But don’t worry about calculating fractional pips or accounting for them in setting your stops or profit targets. In fact, it’s better to just acknowledge your platform uses fractional pips, and then only focus on the whole pips in your trading.

Until next time…happy trading!
Sean

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Forex Language Lessons: What’s a Pip Worth in Plain English

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