What is a Pip in Forex?

What is a Pip in Forex? Lesson No 8

Okay, let’s talk about something important in forex trading, “pips.” You may have heard terms like “points,” “pipettes,” and “lots” spoken around; now we’ll break them down and explain how they function.

Don’t worry, we won’t go too far into maths. It’s only a little, and you’ll get used to it.

Pips are an important concept in the trading business. Take your time learning this information because it is something that every forex trader should know.

Before you start trading, be sure you understand pip values and how to calculate profit and loss. It’s an essential component of the game.

What the heck is a Pip?

A “pip” is the measurement unit for representing the difference in value between two currencies.

Here’s an easy example: If the EUR/USD currency pair changes from 1.1050 to 1.1051, that.0001 gain in USD value is equivalent to ONE PIP.

A pip is typically the last decimal place in a pricing quote. Most currency pairs have four decimal places, with a small number of Japanese yen pairs having only two decimal points.

For example, one pip in EUR/USD is represented by 0.0001, whereas it is 0.01 in USD/JPY. Understanding pips is essential in the world of forex trading for tracking and being aware of changes in prices. 

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What is a Pipette?

Some forex traders quote currency pairs with multiple decimal places. Instead of the standard “4 and 2” decimal places, they use “5 and 3” decimals.

They call these extra decimal places FRACTIONAL PIPS, sometimes known as “points” or “pipettes.”

If you already find the term “pip” confusing, be ready for more! A “point,” “pipette,” or “fractional pip” is one tenth of a pip.

For example, if the GBP/USD exchange rate moves from 1.30542 to 1.30543, the 0.00001 USD increase is referred to as ONE PIPETTE.

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On a trading platform, fractional pip looks like this:

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The tenth of a pip digit is usually shown on trading platforms to the right of the two larger digits.

Here’s a basic pip “map” to assist you understand how to read pips:

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How to Determine a Pip’s Value?

Let’s go over how to determine the value of a pip in a basic way:

Step 1: Understand the Exchange Rate.

Every currency has its own value, and the value of a pip is determined by the currency pair’s exchange rate.

Step 2: Express the exchange rate as a ratio.

Exchange rates are typically expressed as a ratio; for example, EUR/USD at 1.2500 is represented as “1 EUR / 1.2500 USD.”

Example #1: USD/CAD = 1.0200

  • Read as 1 USD to 1.0200 CAD (or 1 USD/1.0200 CAD).
  • Formula: (.0001 CAD) x (1 USD/1.0200 CAD) = 0.00009804 USD per unit traded.
  • If you traded 10,000 units of USD/CAD, a one pip change would be about a 0.98 USD change in position value.

Example #2: GBP/JPY = 123.00

  • Read as 1 GBP to 123.00 JPY.
  • Formula: (.01 JPY) x (1 GBP/123.00 JPY) = 0.0000813 GBP.
  • When trading 10,000 units of GBP/JPY, each pip change is worth approximately 0.813 GBP.

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

Okay, let’s simplify the explanation of calculating the pip value and translating it into your account’s currency.

Step 1: Understanding Your Account’s Currency

Because the worldwide market uses multiple account currencies, it is critical to understand the pip value in terms of your trading account’s currency.

Step 2: Convert Pip Values

Multiply or divide the “found pip value” by the exchange rate between your account currency and the currency under consideration.

If the found pip value is the same as the base currency:

For example, the GBP/JPY pip value in GBP is 0.813. Convert to USD using the GBP/USD rate of 1.5590.

Formula: (.813 GBP) / (1 GBP) x (1.5590 USD) = 1.2674 USD per pip movement.

If converting to the counter currency:

For example, the USD/CAD pip value in USD is 0.98. Convert it to NZD at 1 NZD/.7900 USD.

Formula: (.98 USD) / (.7900 USD) x (1 NZD) = 1.2405 NZD per pip movement.

It’s worth noting that forex traders often carry out these computations automatically. Otherwise, you can use a Pip Value Calculator.

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Conclusion:

While traders usually handle this for you, understanding the process is beneficial. In the next session, we’ll look at how these seemingly small sums can add up. Remember that you are not alone, you can always use resources like our Pip Value Calculator!