Pip – What is a Pip and why does it matter?

Pip basically means “percentage point”, and investors/traders use them all the time to reference losses or gains.

Pip basically means “percentage point”, and investors/traders use them all the time to reference losses or gains.

At the same time, brokers indicate the size of the spread in pips. Pips are most commonly used in Forex trading and reflect the price movement or fluctuation level in the exchange rate of a particular currency pair.

Almost all the most traded currency pairs usually have 4 decimal places in their prices.

You can perform pip value calculation for any currency pair using its last decimal point. Even a pip difference that is a very small unit can reflect significant profit/loss.

That's why pips are considered the most basic and vital unit of measurement when trading Forex. If you are wondering “what is a pip in Forex” and how to use it, keep reading this article as it contains everything you need to know about pips and how they are used in trading Forex .

What is a Pip?

The pip in Forex is a unit of measurement that demonstrates the change in value caused by the price fluctuation between the currencies of a particular currency pair.

Also, in the currency pair value, the pip is the final decimal point (mostly the 4th). However, there are some exceptions, for example Japanese yen pairs, which only represent 2 decimal places.

For example, a company offering if the EUR/USD currency pair shows movement to 1,2541 from 1,2540, 0,0001 US dollars will be a pip.

If you buy a position and the market moves in the direction that results in your favor, each pip move will allow you to earn 1,00 US Dollar and vice versa if you close the position.

On the other hand, if the market does not act in your favor, you will incur a loss of 1,00 US Dollar per pip movement. It is also important to note that increasing or decreasing the amount will affect the pip value in the same way.

Meaning of pips in other markets

Pips are used in trading Forex , CFD trading and cryptocurrency trading. Let's take a look at how a pip differs in different types of financial markets.

What is a pip in stock trading?

Pips are most commonly used in Forex trading, and not many stock traders talk about this concept. The rise or fall of the pip value in stocks is rarely noteworthy.

This is because, in most cases, stock price movement is much more aggressive compared to currency pairs.

Therefore, the smallest stock price fluctuation mostly exceeds one pip.

For example, if the price of a stock moves 10 US dollars down or up by one cent, then it will represent 10 pips.

What is a pip in CFD trading?

in the negotiation of CFD, pip also represents the minimum change in the price of the underlying asset before its CFD changes in value.

It is also expressed as the last decimal point, but with two decimal places. For example, if you buy a CFD on XYZ Stocks paying 1,00 US Dollars, then the price movement of 0,99 or 1,01 US Dollars will represent a pip.

What is a pip in cryptocurrency trading?

in negotiations of criptomoedas, pip also represents the single-digit price fluctuation at a given level.

Most major digital currencies are traded at the US dollar level. Therefore, a move of one dollar will represent a pip.

For example, if you buy a crypto asset at 100,00 US dollars, then the next value of that asset at 00,00 or 101,00 US dollars will represent a single pip.

It is important to keep in mind that lower value digital currencies have different trading scales with different pip measures which can be in cents or a fraction of a single cent.

In short, pips act differently in different markets, and are known as the most important and valuable unit of measurement among Forex traders for quantifying market fluctuations.

Difference between pip and a pipette

A pipette, in simple words, is a fractional pip that is equal to 1/10 of a pip.

In terms of Forex trading, pipettes show extremely small price movements.

The pipette concept is mainly used when the currency pair has more than 4 decimal places, and the 5th decimal place represents the pipette.

You won't have a pipette (5th decimal place) every time, depending on your trade. It is important to keep in mind that some currency pairs, as discussed, such as the Japanese yen has 2 decimal places, will have a pipette at the 3rd decimal place. The following image shows the difference of pip and pipette.

Difference between pip and a pipette

How to calculate pips?

Now that you understand what Forex pips / Forex pips are, let's discuss the pips calculation process.

Calculation of pip value for dollar account

Os currency pairs most commonly traded on the global Forex market are those involving USD second or first.

If your broker's account base currency is US Dollar and USD is ranked second, the pip values ​​will not change. Fixed pip values ​​are:

  • USD 0,01 US dollars for a nano lot representing 100 currency units
  • USD 0,10 US dollars for a micro lot, and represents 1000 currency units
  • USD 1 US dollar against a mini lot, and represents 10.000 currency units
  • USD 10 US dollars for a standard lot, and represents 100,00 currency units

Remember, the pip values ​​above are only applied to currency pairs that involve USD positioned second, such as GBP/USD, EUR/USD, AUD/USD, etc.

On the other hand, if USD is not listed as second, you will need to divide the pip values ​​mentioned above by the USD/XXX rate.

For example, if you are trading with a USD account and the USD/GBP rate is 1,26236 against a standard lot, you can perform a pip value calculation by dividing 10 US Dollars by 1,26236.

Pip = 10/1,26236 US Dollars = 7,921 US Dollars

Calculation of pip value for non-USD account

The pip values ​​are fixed for all currencies listed second in any pair, regardless of the funded/account base currency.

For example, if you have an AUD (Australian Dollar) funded account, currency pairs where AUD is positioned in second place, such as GBP/AUD, USD/AUD, etc., will have a fixed pip value.

  • Micro lot: AUD 0,10 US dollars
  • Mini lot: AUD 1 US dollar
  • Standard Lot: AUD 10 US Dollars

If the currency other than USD is placed first, you will have to divide the pip value/fixed price by the target currency exchange rate for the pip calculation.

For example, if the Australian dollar/Canadian dollar (AUD/CAD) exchange rate is 0,54351, then for the minilot, the pip will be worth 1,8 AU dollars.

Pip = 1 / 0,54351 AU Dollar = 1,8 AU Dollar

How can a Pips calculator help?

Pip Calculator allows you to perform exact pip value calculation in desired currency.

Knowing the pip value is critical to determining whether a particular trade is worth the time, money, and risk. It will also allow you to manage risk effectively.

How does the Pip Calculator work?

The pip calculator measures the pip value by taking the product of the trade value on the lot and a pip. It then divides the product by the current exchange rate of the quoted currency.

You must know the following to calculate pip:

  • the position size
  • The focused currency pair
  • the exchange rate
  • base currency

The formula used by the pip value calculator is:

pip value = lot size x (one pip/exchange rate)

Many brokers have this calculator on their website. XM broker pip calculator is very popular.

Pip basically means “percentage point”, and investors/traders use them all the time to reference losses or gains.

How to calculate pips in your trading account currency?

It is a fact that not all currency pairs for Forex trading include the base currency of your brokerage account.

You are still able to perform pip value calculation if you want to trade in AUD/CAD but with a USD account.

As mentioned earlier, the currency listed in the second position always has a fixed value if you also have the same base currency as the brokerage account.

For example, if you have an AUD account, then the CAD/AUD pip value will be AUD10 for a standard lot. You will only need to convert AUD10 into your currency. For example, you will need to divide the AUD10 by the USD/AUD exchange rate if the base currency of your brokerage account is USD.

On the other hand, if the base currency of your brokerage account is GBP and you want to calculate the AUD/CAD pip value against a standard lot (10 CAD), you will need to divide 10 CAD (standard lot) by the exchange rate EUR/CAD to convert it to EUR. If the exchange rate is 1,56732, then the pip value against the standard lot will be EUR6,38.

Why are pips on Forex important?

Performing the pip value calculation is critical because it allows you to manage the associated risk efficiently.

You will not be able to determine the optimal size of the considered position if the pip value is unknown.

Furthermore, it also allows you to determine how the different exchange rates work and how to carry out the profit and loss calculation, especially in day trading, where changing a few pips is critical.

Most of the time, the base value of your account determines the pip price fluctuation that will apply to all possible currency pairs.

For example, if you open a USD-based Forex account, USD will be the quoted currency and you will be able to track changes in the pip value in USD. It is not very difficult to understand for any Forex trader that pips are of great importance and value.

How does your profit depend on Pips? Examples

As a Forex trader, it is critical to keep in mind that losses or profits are calculated in pips. Almost all renowned and popular online brokers calculate pips value for you.

But it is essential to fully understand the concept of pips to track their fluctuations as it can greatly affect your Forex trading performance.

There are three main factors that determine the monetary value of each pip:

  • The currency pair involved
  • trade size
  • Exchange rate

You also need to keep in mind that your profits and losses also depend on the size of the pips as determined by the following examples.

1 Example

Let's assume you close a EUR/USD trade in two standard lots with a profit of 70 pips at 1,1330. So your total trading profit will be:

pip value = (0,0001/1,1330) x (100.000 + 100.000) = 17,65

(70 pips) x (17.65) = 1235.5

So your total profit will be 1235,5 EUR.

2 Example

Let's assume you close your $30.000 USD/JPY trade with a 20 pips loss at 120,45. So your total trade loss will be:

pip value = (0,01/120,45) x (30.000) = 2,49 US dollars

(20 pips) x (2.49) = 49.8

So your total loss will be 49,8 USD.

Here, you can see that pips are calculated to just two decimal places. This is because the JPY is involved in the currency pair, which always has only two decimal places.

Both of the examples discussed above show that the size of pips has a big effect on profits and losses.

In the first example, the number of pips involved is 70, which generates a profit of more than 1200 euros. On the other hand, the second example has 20 pips which are responsible for the loss of only about 50 US dollars.

Summarizing about pip

We hope you now fully understand what pips are and how you can use them to take your Forex trading to another level.

Keep in mind that understanding the concept of pips is essential to handle all changes in exchange rates more efficiently.

Understanding the pip concept and knowing the pip value of each currency pair allows you to accurately assess the number of pips of risk you will take. It will also allow you to determine if a particular trade is worth the risk or not.

Pip basically means “percentage point”, and investors/traders use them all the time to reference losses or gains.Pip frequently asked questions

 

What is Pip?
A pip is the price movement at the exchange rate and is worth 0,0001 US dollars.
What is the value of 1.000 pips?
1.000 pips are worth 0,1 US dollars.
Is Forex Trading Good?
The Forex market has the potential to greatly multiply your investment. Some people suggest that you can earn ten times your initial investment overnight. But it just depends on your trading experience and risk management techniques.
Why is understanding pip important?
At a given exchange rate, a pip represents the price movement and understanding it is essential, especially for the Forex trader. This is because it helps you to enter or modify your orders not only to improve your trading strategy but also to manage your profit and loss.
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