What is Nickel
In the foreign exchange (FX) market a nickel is slang which means five basis points (PIP) or, five one-hundredths of a percentage point (0.05%). The term also indicates a metal and a unit of U.S. currency.
In financial markets, traders use slang terms like nickel to refer to small changes in the interest rate. Slang terms are standard, particularly in markets like forex or government debt where such small shifts are routine.
BREAKING DOWN Nickel
Nickel as a term for five basis points (PIP) is typically used by forex traders to denote interest rate changes that a central bank makes. Also, it may indicate changes in the value of a given currency over the course of a trading session. Forex rates are usually expressed in a whole number format, and use four decimal places instead of using fractions for remainders.
For example, the USD/EUR currency pair quote will appear as 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.
A Nickel's Impact on Profits and Losses
Basis points and pips help investors calculate gains and losses throughout a trading session. Foreign exchange prices list in currency pairs describing the price of one currency to another.
For example, imagine that a foreign exchange trader believes the value of the euro (EUR) might rise against the U.S. dollar (USD) in daytime trading. The currency pair lists at EUR/USD 1.2100. This price means 1.21 euros will exchange for one USD. The trader buys 100,000 euros at the cost of $121,000.
A few hours later, the value of the EUR/USD rises to 1.2105, adding a nickel, or 5 pips, to the value. The trader who bought 100,000 euros made a profit of 0.05%, 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.
Calculating the Value of a Nickel
Traders may 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, 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 (0.0001 / 1.30 x 100,000 = 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.
Outside of the foreign exchange marketplace, the term can also indicate a type of metal and a unit of U.S. currency which is 5/100 of a dollar.