In the last lesson, we learned that we can buy and sell currency pairs, hoping that their prices rise or fall. But how do we measure how much a pair has risen or fallen?
That’s where pips come in.
What is a Pip in Forex Trading?
Just like a pip is the smallest part of a fruit, a pip in the Forex market refers to the smallest unit by which the price of a currency pair can change. Pip is an abbreviation for Percentage in Point or price interest point. And it’s the unit of measurement used to express the change in value in a particular currency pair.
Professional Forex traders express their gains and losses in the number of pips their position rises or falls.
For example, if the EUR/USD moves from 1.2713 to 1.2714, that 0.0001 pip change rise in the exchange rate is 1 pip.
Fun fact: All major currency pairs go to the fourth decimal place to quantify a pip. A notable exception, though, is the Japanese Yen, which only goes to two. That second figure after the decimal point in Japanese yen pairs are where we count our pip value.
Calculating the Value of a Pip
So now that we know what a pip is, what does it mean to us in terms of how much profit we make or how much money we can lose for each price movement?
This depends on the size of the position we open in the Foreign Exchange market. Larger positions mean each pip movement in the pair will have a greater monetary consequence to our balance.
To calculate this is quite simple. Let’s take an example and stick with our two currencies – the EUR versus USD.
Example: One Pip Move
Say we wanted to open a position size of 10,000 units. Our calculation to establish what a one pip movement means to us is as follows:
10,000 (units) x 0.0001 (one pip) = $ 1 per pip
So a position of 10,000 means that every time the pair moves 0.0001 (or 1 pip), we make a profit or loss of $1.00 depending on which way it moves, meaning the pips value is $1. If the position moves 100 pips, we will make a profit or loss of $100.
What is a Pipette/Point?
Some forex brokers represent their currency pairs to five or three decimal places instead of the standard four and two decimal places. That’s because they’re representing their prices using fractional pips, which are called pipettes or points.
A pipette is a tenth of one pip. Brokers use the so that they can offer their traders tighter spreads.
How Do Pips Work in Forex Trading?
We can do this for currency trades of any size. The calculation is simply the forex trade size x 0.0001 (1 pip).
5,000 (units) x 0.0001 (1 pip) = $ 0.50 per pip
50,000 (units) x 0.0001 (1 pip) = $ 5 per pip
125,000 (units) x 0.0001 (1 pip) = $ 12.50 per pip
The pip value in any currency pair’s exchange rate is always measured in the currency of the quoted currency of the pair, e.g. the quote currency on the right-hand side of the pair.
So in the example of the EUR/USD, we see our pip value is always in US Dollars (which is the counter currency).
If we were trading the USD/EUR pair, the pip value would be calculated in Pound Sterling (EUR being the counter currency and USD being the base currency).
So…
10,000 units x 0.0001 (1 pip) = £ 1.00 per pip
50,000 units x 0.0001 (1 pip) = £ 5.00 per pip
125,000 units x 0.0001 (1 pip) = £ 12.50 per pip
Example: 10 Pip Move
If the value of the Euro increases against the dollar by 10 pips then we would see a movie like this.
10,000 units x 0.0010 (10 pip) = £ 10.00 per pip
50,000 units x 0.0010 (10 pip) = £ 50.00 per pip
125,000 units x 0.0010 (10 pip) = £ 125.00 per pip
Example: 100 Pip Move
If the value of the GBP rises against the dollar by 100 pips then we would see a move like this.
10,000 units x 0.0100 (100 pip) = £ 100.00 per 100 pips
50,000 units x 0.0100 (100 pip) = £ 500.00 per 100 pips
125,000 units x 0.0100 (100 pip) = £ 1,250.00 per 100 pips
KEY TAKEAWAYS
- A pip is the smallest unit by which the price of a currency pair can change.
- It’s basically the fourth decimal number on most forex currency pairs and the second decimal figure on the JPY pairs
- The value of your pip depends on the amount of position you’re investing in a trade.
- A point or pipette is a fractional pip. It’s the tenth if pip. Most brokers have it as a fifth decimal place on most pairs and the third decimal place on the JPY pairs.
Wrapping Up
And that’s all about how a pip works!
Even though you’re now a pip legend, I know exactly what you’re thinking….
Do I really need to calculate all this every time I make a trade?
No, you don’t!
I know I said to read this and scream at your monitors until you understand it, but I think now’s the right time to admit that there is an easier way…
Nearly all Forex brokers will work all this out for you automatically on their trading platforms when you trade forex (…and hey now you know how they calculate it!). Or you can always use our Pip Value Calculator to know what the pip values are and analyze price movements in currency trading.
And on to the next topic where we’ll be talking about what lots are. Here’s a spoiler: See those units that we multiplied our decimal places by when calculating pip values? They’re called lots.
