For years, the smallest movement of an asset’s price was measured with 1 pip. Depending on the asset’s type, this pip may be placed in the 4th decimal place or in the second one. For example, if we take a look at the EUR/USD currency couple, we see that it is currently trading for 1.2822.
Therefore, the smallest change in the pair’s price can be an increase to 1.2823 or a decrease to 1.2821. The same goes for currency pairs where there are just two decimal points. At the moment, USD/JPY can be traded for 102.98, so it can either increase to 102.99 or decrease to 102.97. Since this type of pip movement has been around for years, most traders are used to seeing it.
However, as electronic Forex brokers gained pace, they started introducing new innovations and methods that altered the way specific assets are rated and traded. One of the biggest innovations is certainly the introduction of the fractional pip. This is done by adding one additional decimal place to the price quotes of specific assets. Thanks to the fractional pip, the trader can get better understanding of the price’s movement and follow it closely. With fractional pips, currencies which used 4 decimal places now use 5, and pairs which used 2 decimal places now have 3.
Undisputedly, the biggest benefit of using fractional pips is the broker’s ability to offer a better spread to its traders – brokers using fractional pips can offer a spread of 1.5, 2.5 and etc. Saving half a pip may not seem like much, but traders who regularly close expensive trades and deal with large amounts of money will certainly appreciate this improvement of the Forex market.