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What is Pip in Forex Trading
Pip and Its Value
Pip is the smallest change an exchange rate of a currency pair can make on the market. A pip is usually, but not always, the last decimal place of a quotation.
In this artcile we will introduce you to the concept of Pip - the Whats and The Hows. How Pips are calculated and used in trading currency pairs. And will show it on example, so everything will be clear. These are the main themes, we will explore together in this article.
- What Is Pip In Forex Trading?
- How are pips calculated?
- Forex Pip Example?
What is Pip
Pip is an acronym for "percentage in point" - standardized unit of change in the price of a trading instrument. 1 pip is calculated by the 4th digit 0.0001.
For investors interested in trading currencies, understanding What is Pip is an important element in analysing currency and market movements. It helps them determining the overall cost and profit that can be generated by a trade.
Most currency pairs are priced to 4 decimal places with the pip being the change of the last decimal point.
- For currency pairs displayed to 4 decimal places, one pip = 0.0001
- Only for the group of currency pairs with the quoted currency Japanese Yen, as well as a “Precious Metals” group that are an exception and are displayed to only two decimal places, one pip = 0.01
For most currency pairs, for example GBP/USD, it is a convention to record with an accuracy of 4 decimal places (1 pip = 0.0001), and trade in terminals with an accuracy of 5 decimal places (1 technical pip = 0.00001). Spreads, order distances and other parameters are shown in usual pips on the websites of companies, though in trading terminals of these companies, quotes are indicated with an accuracy of 0.00001. In the group of currency pairs with the quoted currency Japanese Yen, as well as a “Precious Metals” group, the usual pip is 0.01, and the technical pip is 0.001.
Here is an example to figure out what a 1 pip change would look like for GBP/USD pair.
Let’s assume that the currency pair buy price is currently quoted at 1.32711. If the price changes from 1.32711 to 1.32712 that would mean an increase of 1 technical pip. If the price changes from 1.32711 to 1.32710 that would be a decrease of 1 technical pip.
A 1 usual pip move for the USD/JPY pair would be the change from 112.90 to 112.91 because the second decimal point has changed by 1.
To manage risk more effectively, it is important to know the pip value of each position in the currency of your trading account.
The value of 1 pip is expressed in the quoted currency (the second currency of the pair).
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How to Calculate Pip Value:
The value of pip depends on the following three factors:
- the quoted currency
- the volume of the trade
- and the exchange rate
Based on these factors the fluctuation of even a single pip can have a significant impact on the value of the open position.
The value of 1 pip is calculated by the following formula:
The value of 1 pip = (Pip in decimal places * Trade Volume)
Here are the examples of the Pip Value calculation according to the Pip Value Formula:
Example A: 1 pip volume in EUR/USD is equal to 0.0001
| 1 pip value | ||
| 100,000 EUR | 100,000 * 0.0001 | 10 USD |
| 10,000 EUR | 10,000 * 0.0001 | 1 USD |
| 1,000 EUR | 1,000 * 0.0001 | 0.1 USD |
| 100 EUR | 100 * 0.0001 | 0.01 USD |
Example B: 1 pip volume in USD/JPY is equal to 0.01
| 1 pip value | ||
| 100,000 USD | 100,000 * 0.01 | 1000 JPY |
| 10,000 USD | 10,000 * 0.01 | 100 JPY |
| 1,000 USD | 1,000 * 0.01 | 10 JPY |
| 100 USD | 100 * 0.01 | 1 JPY |
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