Forex trading is a complex and intricate financial activity that requires a deep understanding of various concepts and terminologies. One such concept is pip and pipette. These terms are used to measure the price movement in the forex market. In this article, we will explain what is pip and pipette in forex.
What is Pip?
Pip stands for “Percentage in Point” or “Price Interest Point” and is the smallest unit of measurement in the forex market. It represents the fourth decimal place in the currency pair, except for the Japanese yen (JPY), where it represents the second decimal place. For example, if the exchange rate of EUR/USD is 1.1234, the pip value is 0.0001.
The pip value is important as it determines the profit or loss in a forex trade. For instance, if you buy EUR/USD at 1.1234 and sell it at 1.1244, you have made a profit of 10 pips. If you trade with a standard lot size of 100,000 units, the profit will be $10. However, if you trade with a mini lot size of 10,000 units, the profit will be $1.
Pips are also used to calculate the spread, which is the difference between the bid and ask price. The spread is usually measured in pips, and it represents the cost of trading. Brokers charge a spread to earn their commission, and it varies from broker to broker and currency pair to currency pair.
What is Pipette?
Pipette is a fractional pip or a tenth of a pip. It is also known as a “point” or “tick.” It is used to measure the price movement more accurately, especially for currency pairs with high volatility. For example, if the exchange rate of USD/JPY is 111.345, the pipette value is 0.5.
Pipettes are also used to represent the spread, especially for ECN (Electronic Communication Network) brokers who offer low or zero spreads. These brokers display the prices with five decimal places or six decimal places, which include the pipette value. For example, if the bid price of EUR/USD is 1.12345 and the ask price is 1.12355, the spread is 1 pipette or 0.1 pip.
Pip vs. Pipette
Pip and pipette are two different units of measurement, but they are related. Pip is the standard unit of measurement, and pipette is a fraction of it. Pipette is more precise and accurate, especially for traders who use scalping or day trading strategies. However, not all brokers offer the pipette value, and it may not be necessary for traders who trade with longer timeframes.
Pip and pipette are also different from points and ticks, which are used in other financial markets such as stocks, futures, and options. Points and ticks represent the minimum price movement, and they vary from market to market and asset to asset.
Conclusion
Pip and pipette are essential concepts in the forex market. They represent the smallest unit of measurement and determine the profit or loss in a trade. Pipette is a fractional pip and is more accurate for currency pairs with high volatility. Traders should understand the pip and pipette values and how they affect their trading strategies and risk management.
