Forex trading involves a lot of technical terms and calculations. One of the most important of these is the pip. A pip is the smallest unit of change in the price of a currency pair in forex trading. It is an acronym for “percentage in point” or “price interest point” and is used to measure the change in the exchange rate of a currency pair.
A pip is usually expressed in decimal points or fractions of a currency unit. In most cases, the pip is the fourth decimal place in a currency pair. For example, if the EUR/USD is trading at 1.1234, a one-pip movement would be from 1.1234 to 1.1235. However, for currency pairs that have a Japanese yen (JPY) as the quote currency, the pip is the second decimal place. For instance, if the USD/JPY is trading at 108.55, a one-pip movement would be from 108.55 to 108.56.
One of the reasons why forex does not tell you the value of a pip in USD is that it is a global market, where traders from different countries use different currencies. Therefore, it would be impractical to use USD as the standard currency to express pip values. Instead, the value of a pip is expressed in the quote currency of the currency pair being traded. For instance, if you are trading the EUR/USD, the pip value would be expressed in euros since the quote currency is the euro.
To calculate the value of a pip in a currency pair, you need to know the exchange rate of the currency pair, the lot size, and the currency of your trading account. Lot size refers to the amount of currency you are trading. In forex trading, lot sizes are expressed in standard lots, mini lots, and micro lots. A standard lot is 100,000 units of the base currency, a mini lot is 10,000 units, and a micro lot is 1,000 units.
The formula to calculate the value of a pip is:
pip value = (0.0001 / exchange rate) x lot size x currency of your trading account
For instance, if you are trading the EUR/USD, the exchange rate is 1.1234, and you are trading a standard lot with a USD trading account, the pip value would be:
pip value = (0.0001 / 1.1234) x 100,000 x USD = $8.90
Therefore, a one-pip movement in the EUR/USD with a standard lot would result in a profit or loss of $8.90, depending on the direction of the trade.
In conclusion, the pip is an essential concept in forex trading that represents the smallest unit of change in the price of a currency pair. It is used to calculate the profit or loss of a trade and is expressed in the quote currency of the currency pair being traded. Forex does not tell you the value of a pip in USD because it is a global market where traders use different currencies, and it would be impractical to use USD as the standard currency to express pip values.
