28 Sep, 2023

What is a Pip in Forex?

A pip in Forex, short for "percentage in point," represents the smallest price movement in exchange rates. It typically refers to the fourth decimal place in most currency pairs, indicating a one-unit change in the last decimal of the exchange rate. Pips are crucial for measuring price changes and determining profits or losses in Forex trading.


What Exactly is a Pip?

You may have come across terms like "pips," "points," "pipettes," and "lots" in the world of forex trading. Let's delve into their meanings and explore how to calculate their values.

We'll be doing a bit of math here, so take your time to understand these concepts. They are fundamental knowledge for all forex traders, and you should refrain from trading until you're comfortable with pip values and the calculation of profits and losses.

What the heck is a Pip?

A "pip" is the unit of measurement used to express the change in value between two currencies. To put it simply, if EUR/USD moves from 1.1050 to 1.1051, that increase of 0.0001 USD in value represents ONE PIP.

Typically, a pip corresponds to the last decimal place in a price quote. Most currency pairs are quoted with four decimal places, although there are exceptions, such as Japanese yen pairs, which are quoted with two decimal places.

For EUR/USD, one pip is 0.0001, while for USD/JPY, it's 0.01.

Understanding Pipettes

Some forex brokers go beyond the standard "4 and 2" decimal places and quote currency pairs with "5 and 3" decimal places. This introduces the concept of "pipettes," also known as "points."

If you found the idea of a "pip" confusing, get ready to be a little more perplexed because a "point," "pipette," or "fractional pip" is equivalent to one-tenth of a pip.

For instance, when GBP/USD moves from 1.30542 to 1.30543, the increase of 0.00001 USD is ONE PIPETTE.

On trading platforms, you'll usually see the digit representing a tenth of a pip to the right of the two larger digits.

Calculating the Value of a Pip

Since each currency pair has its own relative value, it's essential to calculate the pip value specific to that pair.

In the following example, we'll work with a quote having four decimal places.

For clarity in the calculations, exchange rates will be expressed as ratios, such as "1 EUR / 1.2500 USD," to better understand the process.

Let's explore the concept of pip value in forex trading with a couple of examples:

Example #1: USD/CAD = 1.0200

This currency pair is quoted as 1 USD to 1.0200 CAD (or 1 USD/1.0200 CAD).

The formula to calculate pip value is:
(Value change in the counter currency) x (Exchange rate ratio) = Pip value (in terms of the base currency)

So for USD/CAD:
[0.0001 CAD] x [1 USD/1.0200 CAD] = 0.00009804 USD per unit traded

If you were trading 10,000 units of USD/CAD, a one pip change in the exchange rate would result in approximately a 0.98 USD change in the position value (10,000 units x 0.00009804 USD/unit). Please note that this is an approximation, as the exchange rate can fluctuate.

Example #2: GBP/JPY = 123.00

This currency pair measures a one pip change as 0.01 JPY, as it only goes to two decimal places.

The formula for pip value in this case is:
(Value change in the counter currency) x (Exchange rate ratio) = Pip value (in terms of the base currency)


[0.01 JPY] x [1 GBP/123.00 JPY] = 0.0000813 GBP

When trading 10,000 units of GBP/JPY, each pip change in value is worth approximately 0.813 GBP.

How to Find the Pip Value in Your Trading Account’s Currency?

To determine the pip value in your trading account's currency, you can easily convert it. Multiply or divide the "found pip value" by the exchange rate of your account currency and the currency in question.

If the "found pip value" currency is the same as the base currency in the exchange rate quote (e.g., GBP/USD):
For instance, to convert the pip value from GBP to USD, use GBP/USD at 1.5590 as the exchange rate ratio:
0.813 GBP per pip / (1 GBP/1.5590 USD) = 1.2674 USD per pip move

So, for every 0.01 pip move in GBP/JPY, the value of a 10,000 unit position changes by approximately 1.27 USD.

If the currency you are converting to is the base currency of the conversion exchange rate ratio (e.g., USD/CAD), then multiply the "found pip value" by the conversion exchange rate ratio:
To find the pip value of 0.98 USD in New Zealand Dollars, use 0.7900 as the conversion exchange rate ratio:
0.98 USD per pip x (1 NZD/0.7900 USD) = 1.2405 NZD per pip move

For every 0.0001 pip move in USD/CAD, your 10,000 unit position changes in value by approximately 1.24 NZD.

While most forex brokers automatically calculate these values for you, it's essential to understand how they work. If your broker doesn't provide this service, you can use a Pip Value Calculator. In the next lesson, we'll explore how these seemingly small amounts can accumulate.

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