DEFINITION of 'Nickel'
Nickel is a slang term meaning five basis points, or 5 pips, in foreign exchange analysis. A nickel is essentially the equivalent of 0.0005 or 0.05%. A pip is the smallest price change that a currency can make when compared with other currencies, and its value is 0.01%, or 0.0001.
BREAKING DOWN 'Nickel'
In forex, basis points are typically used to denote interest rate changes made by a central bank and changes in the value of a given currency over the course of a trading session. Forex rates are usually expressed in whole number format and use four decimal points instead of fractions for remainders. For example, the USD/EUR currency pair is quoted at 1.2512. A nickel adjustment upward would increase the quote by 0.0005, since each basis point is worth 0.0001. The new rate would be 1.2517.
How a Nickel Affects Gains and Losses
Base points and pips help investors calculate gains and losses throughout a trading session. Currency prices are listed in pairs based on the price of one currency to another. As an example, a foreign exchange trader believes the value of the euro might rise against the dollar in daytime trading. The relationship between the EUR/USD stands at 1.2100, or 1.21 euros per $1. The trader buys 100,000 euros at a price of $121,000.
A few hours later, the value of the euro against the dollar rises to 1.2105, adding a nickel, or 5 pips, to the value. The trader who just bought 100,000 euros just made a profit of 0.05%, or approximately $60. The trader, at this point, converts the euros back to dollars. If the euro falls against the dollar, the person could still make a profit by keeping the currency in euros instead of converting them back to dollars and then trading them back at a later time.
How to Determine the Value of a Nickel
Traders can calculate the value of 1 pip by dividing 1 pip, or 0.0001, by the exchange rate and then multiplying that number by the amount of money the trader wants to invest. If the exchange rate of USD/EUR is $1.30 for 1 euro, and an investor wants to spend $100,000, 1 pip is worth 0.0001 divided by 1.30 and then multiplied by $100,000. The value of one pip on this trade is approximately $7.69.
After the trade completes, investors can easily determine the profit or loss made by multiplying the pips by $7.69. If the exchange rate rises 100 pips, the person makes $769 on the trade. Pips always change value based on the currencies exchanged and the amount of money invested in the trade.