‘Pip,’ the word sounds pretty familiar, right? Well, that’s because this is a fundamental term when it comes to trading in the forex market. Pip forms the base for reading the price changes in the currencies. Hence, understanding this lesson is very important. So, let’s begin by defining what a pip is.
What is a pip?
Pip is a unit of movement in currency pairs. It basically tells, by how many values the price of the currency pair has changed. A pip is the same for all the pairs except for the currencies paired with JPY. One pip for every JPY pairs is 0.01 while it is 0.0001 for the rest. Hence, the fourth decimal place in the price of the currency pair represents a pip for non-JPY pairs, and the second decimal place in the price represents a pip for JPY pairs. Now, let us comprehend this with an example.
Let’s say the current market price of EURUSD is 1.1000. We say a currency price has moved by one pip when the price rises to 1.1001. Similarly, when the price goes up to 1.1008, we say the price has moved to by 8 pips (w.r.t 1.1000). Taking it further, if the price goes up even higher until 1.1010, we say the market has risen by 10 pips. From these three examples, we can come up with the formula for pip as follows:
Pip = current market price – initial price under consideration (For long position)
Pip = initial price under consideration – current market price (For short position)
Let’ say the CMP of USDCAD is 1.3230. Later, the price shoots to1.3293. Let us calculate how many pips have this pair increased.
Pip = 1.3293 – 1.3230
Pip = 0.0063
Hence, the currency has risen by 63 pips.
The change in the value of the price on the fourth decimal point represents the pip change between 0-9.
The change in the value of the price on the third decimal point represents the pip change between 10 and 99.
The change in the value of the price on the second decimal point represents the pip change between 100 and 999.
The change in the value of the price on the first decimal point represents the pip change between 1000 and 9999.
Let us understand this by an example. Let’s say the current market price of a currency pair is 0.5829.
Here, 9 indicates 9 pips,
2 indicates 20 pips,
8 indicates 800 pips, and
5 indicates 5000 pips.
What is Pip a value?
The pip value adds value to the pip by determining its ‘worth’ in terms of the base currency. Pip value for a currency pair can be calculated using the below formula.
Pip value = change in the value of counter currency * exchange rate ratio
Example: Let’s say the price of GBPUSD is 1.2450. That is, 1 GBP is equal to 1.2450 USD. Now, if price moved by one pip, i.e., to 1.245. The pip value for this can be calculated as follows.
Pip value = 0.0001 USD * (1 GBP/1.2450 USD)
Pip value = 0.00008032 GBP
Hence, by trading one unit GBPUSD, you will make 0.00008032 GBP. Similarly, trading 100,000 units of this pair, you will get 8.032 GBP.
What is Pipette?
Apart from pips, brokers represent quotes in pipettes, as well. An increase in the decimal place of a pip will get you the pipette value. So, the 5th decimal and 3rd decimal place represents pipettes for non-JPY pairs and JPY pairs, respectively.
For example, if the price of EURUSD increases from 1.21001 to 1.21002, we say the price has risen by 2 pipettes.
That’s all about Pips. If you have any more questions, let us know by commenting below. Don’t forget to check your learning by answering the below questions.