Calculating Pips in Binary Options – Demystifying Currency Trades

Calculating Pips in Binary Options – Demystifying Currency Trades

Let’s face it:  Online trading has streamlined the traditional investment process and is the way of the future.  No longer do we need to pay large sums of money to simply gain access to a major trading floor, and the quick access to information offered by the internet’s best sources have made it possible to trade even volatile new events from a home computer.  But these trends have also changes the trading instruments that are most commonly used.  Initially, forex trading was all the rage.  This was followed by a surge in popularity for those trading binary options. 

But what about the investors that want to combine these methods?  Can we trade both forex and binary options?  The answer is not only “yes,” but a clear yes.  And this method of trading has quickly risen to become the most popular form of options trading.  but in order for binary options traders to get started in using forex pairs, we need to have an understanding of the basics.  In stock trading, price movements are denominated in Dollars and Cents (or in the currency units of the country where the company is owned).  In forex, the equivalent unit is called the pip (which is short for percentage point).

What is a Pip, How is it Calculated?

Pips are the standardized base units in the forex market.  This is the smallest amount a currency quote will change as you are trading.  For US Dollar-denominated pairs, this generally equates to $0.0001 or 1/100th of 1%.  Brokers use unit sizes that are this small as a way of protecting investors from accumulating large losses. For example, if a pip was 100 basis points, a one-pip difference would lead to extreme volatility in personal trading accounts.  Small pip sizes help to keep things more manageable, and make it less likely you will encounter extreme losses.

Relevance in Binary Options

For those with experience with binary options, pip calculations might seem irrelevant.  But the fact is that forex pricing is no different in the binary options market, so if you want to be able to successfully manage your position sizes you will need to have an understanding how of these markets are priced.  It can be argued that pip values are much more important when trading spot forex, as the number of pips above or below your entry price is what will determine the value (the amount gained or lost) in your trade.  In binary options, you are simply looking for market to close above your strike price (for CALLS) or below your strike price (for PUTS) at your expiration times.  So, for practical purposes, pip values will mostly be used as a way of determining how far prices can rise or fall after you enter your trade.

Conclusion:  In Binary Options, Pip Values are Most Important for Perspective Rather than Gains or Losses

On the whole, if you do not feel you have a strong understanding of how to calculate a pip — don’t worry about it.  A pip is simply the smallest unit measure in a currency pair.  It is no different than a penny in a stock price movement.  It should be understood that there are some small differences in currency pairs, and this usually depends on which way the pair is denominated.  The USD/JPY, for example, is denominated in Yen, and EUR/USD is denominated in Dollars.  But, overall, a ten pip gain in any of these pairs is going to be largely similar and this is not an issue you should be worried about when you are looking to get started using forex in your binary options trades. 

My advice is to start with small trade sizes and see how profits and losses accumulate.  Once you have a few trades under your belt, you will feel perfectly comfortable enacting currency trades in your binary options positions.