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Forex Market

What Is Pip & Why Should You Know About It?

What is a pip?

Essentially, a pip represents the price interest point. It is known to be the smallest numerical price move in the forex market. As you know that most currencies are priced to 4 decimal places, obviously, any change in price would start from the last decimal point. For example, in the price quote, $1.0002, ‘2’ indicates the pip value. A pipette means the 5th decimal place, while pip is the 4th decimal place.

For most pairs (except JPY), it is equivalent to 0.01% or 1/100th of one percent. In the forex market, this is referred to as Basis Point (BPS). One BPS is equal to 0.01% and denotes the percentage change in the exchange rate.

Calculation of move

Now that you know what pip means, let us see how it changes the profit and loss in your trading account. Large positions will have greater monetary consequences in your balance. The formula for calculating the value of the position is:

Position size x 0.0001 = Monetary value of pip

Let us use the above formula and apply it in some real pairs. If you open a position of 1000 units, the pip value can be calculated as 1000 (units) x 0.0001 (one pip) = $0.1 per pip.

When you open buy positions and market reacts in your favor, for every pip movement, you will earn $0.1, and the same is the case for a sell position. If the market moves against you after you buy or sell, $0.1 will be lost per pip movement as the trend continues in the opposite direction. Increasing or decreasing the number of positions will have the exact effect on the pip value.

Different currencies and their pip value

Pip value varies per currency as they are dependent on how it is traded. It also depends on the trading platform and the price feed. It is important to know that there are brokers who show four digits as pip, and some show five. One of the most important points you need to know is the average daily trading range, in order to gauge volatility in the market.

Average daily pip movement of major currency pairs

Conclusion

To conclude, pips are the smallest increment by which a currency pair can change in value and represents the fourth decimal of a currency pair other than the Japanese yen. In the case of Japanese yen, the pip is located at the second decimal place. Proper knowledge of pips will help you determine your stop loss size, as it is a major part of any strategy. One should never underestimate the simplicity of pip. Now that you have learned what a pip means, you can proceed to more trading concepts. Cheers!

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Forex Course

9. Understanding The Concept Of ‘Pip’ In Detail

Introduction

‘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.

Pips extended

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.

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