Profit and loss is a top priority in forex trading, but the costs associated with trading also need to be monitored very closely。Costs such as "points" (PIPs) can constitute the difference between positive and negative bottom lines。

It is easiest to illustrate the meaning of a point by using the sample trades shown on the online broker trade execution monitor.。Studying the difference between buy and sell prices once again confirms that we want this difference to be as small as possible, with the gap measured in points。For example, if we take EURUSD with a buy price of 1.1738, the selling price is 1.1737, then there is a 1-point difference between the bid and ask prices。For most major currencies, the point value can be in the fourth decimal place。

What is a tenth of a point？

Prior to a detailed analysis of this fifth decimal place ("tenth of a point"), it is worth noting that intense competition among online brokers continues to drive down transaction costs.。Brokers now no longer compete in points, but in tenths of a point, or 1 / 10 of a point, which is good news for forex traders using their platform.。

For example, both the bid price and the ask price show the four decimal places price 1.1751。The difference between the two prices is 6 tenths of a point, using 5 decimal places to calculate the difference: 1.17519-1.17513 = 0.00006。

Back to the yen, the dollar-yen scale is the third decimal place (not the fifth)。The following screenshot from the Trade Monitor shows the difference between the seven tenths of a point bid and ask prices: 106.148-106.141 = 0.007。

In periods of strong market liquidity, spreads tighten and are quoted at tenths of a point。In quieter times, they expand and can be quoted in the form of dots。

How to Calculate Point Value？

So far, we have determined how to identify and calculate the value of foreign exchange points and tenths, so what is this number in cash terms?？

Calculating the value of each point requires calculating the value of the point through the formula。It is worth noting that currency pairs also affect point values。In other words, the point of the euro pound is not worth the same as the point of the Australian dollar.。

Taking the 1-point value as an example, and based on the USDJPY example above, we calculate 1 point as follows:

[.01 yen] x [$1 / 106.14 yen]

[(.01 yen) / (106.14 yen)] x $1

= 0.01 / 106.14 = 0.00009422 USD

Thus, when trading 10,000 units of USDJPY, the change in value of each tenth of a point is approximately 0.9422 USD

A quick check is also beneficial because it confirms that the cost of the proposed transaction is about one dollar, which is appropriate for a transaction of this size, and it is not large enough to abandon the transaction。Our main concern is our income statement, not the broker。

If our account is denominated in U.S. dollars, then the above example (representing points in U.S. dollars) can easily be incorporated into our strategy modeling。In another case, that may not be the case。For example:

The point value of GBPCHF point difference is 1.19563-1.19593 = 3 points, or 30 tenths:

[0.0003 CHF] x [£1 / 1.1956 CHF]

[(.0003 CHF) / (1.1956 CHF)] x £1

= 0.0003 / 1.1956 = 0.00025092 pounds

Please note that since we are not considering the yen, we want to use the fourth decimal place。If we trade 10,000 units, the value of the position will be 2 for every point of movement of the above trading position..Change of £59。The quick sanity check shows that this is greater than the point value in the USD-JPY example。However, this is consistent with the spread of the pound being three times that of the first example - reflecting less liquidity in the GBPCHF market。

Since the base currency of our account is the US dollar, the value of the pound sterling is based on the market exchange rate GBPUSD = 1.31 Conversion。This means that the point value in pounds = 0.00025092 x 1.31 = 0.0003287。In our position of 10,000 units, for every point moved, the value goes up 3.$28。

point and profit

Now is the time to apply this knowledge to trading。By considering the situation where the quotes of different broker pairs (non-yen) forex pairs are accurate to four decimal places, we can determine which brokers can provide narrower spreads and better trading conditions。

If you trade EURUSD and take 1.Buy the euro at 17710 and take 1.The price of 17790 exits the trade and you will get a profit of 80 points。

The dollar point value of the GBPCHF position is constantly changing and is affected by three variables: the spread between the bid and ask prices that may change, the GBPCHF foreign exchange rate, and the GBPUSD exchange rate。

Of course, converting spreads to cash depends on the size of the position。The larger the position, the greater the cash profit or loss (in points) for the same trend。

points, tenths and hyperinflation

If you watch your position at the close of the market, trading gains and losses may suddenly turn against you。As liquidity drains from the market, brokers widen spreads to ensure that they do not fall into out-of-the-money positions when prices fluctuate significantly。If you take 1.The price of 3122 sells them the GBP / USD position and the price moves to 1.3120, then they will suffer a loss of profit or loss。

As a result, the difference between the bid and ask prices may change from a tiny point to a smaller one during periods of market bland。Any positions you hold will be marked with the new price。Therefore, it is important to know the latest market opening times。The forex market trades on a 24 / 5 basis, but most brokers have variable spreads。

In the most extreme cases, the point value of the position can become almost insignificant and technically impossible to trade。Hyperinflation (more than 50% monthly inflation) and currency depreciation can push the exchange rate to unmanageable levels。Paper money became so worthless that it was used to make children's toys or make fires。

Germany's hyperinflation dates back to 1923, but other countries have experienced hyperinflation / devaluation moments in the recent past。The situation in Venezuela remains fluid, with Argentina averaging 300% annual inflation between 1975 and 1990, and it looks like this price inflation could be back on the agenda again.。

In 2001, the Turkish lira reached the level of 1.6 million lira per dollar, which cannot be traded on many trading systems because the IT infrastructure cannot accommodate so many decimal places.。The government took the approach of eliminating six zeros in the exchange rate and renamed it the New Turkish Lira.。

The advice for beginners is to stick to the most liquid major money markets and look for spreads measured in decimal points or even decimal points。