What is a Pip in Forex and How to Calculate Pip Value

Forex Trading terminology is an integral part and every beginner trader should learn it, if haven't by now.

In this article, we will take a closer look at what pips (percentage in point) are in Forex and the stock market. In addition to the definitions, let's calculate the cost of a point.

Trading is not only making deals, a trader must be savvy, including in general matters. Therefore, today's topic is important. Even if it seems to you that everything is clear in this matter, take a couple of minutes and refresh your knowledge in your memory by reading another article about What is Forex trading and how does it work.

Table of Content

1. What is a Pip in Forex
2. What is a Pipette
3. How to Calculate Pip Value
4. Pip Value Calculation Formula
5. Pip Example
6. Bottom line on What is a Pip

KEY TAKEAWAYS

• Pips usually refer to futures trading. One pip is the smallest price increment change that can occur to the left of the decimal point.
• In Forex, 1 pip always corresponds to the monetary equivalent, and when calculating potential profit or loss, the trader also always converts points into dollars.
• The point consists of ticks, which are price movements that occur on the right side of the decimal point when viewing the price of a futures contract.
• Pip value = (pip size / exchange rate) x position size.

What is a Pip in Forex

A pip in Forex is a unit of measurement that represents the smallest change in the exchange rate between two currencies. There are a few different concepts worth defining and learning their differences. So, let’s start with definitions, here they are:

• A point is a unit of rate change.
• Now about what pips are. This is a hybrid formed from the terms percentage and point. The meaning is similar, a pip denotes the minimum change in the asset's rate.
• Tick - any movement of the chart.

Points

Pips usually refer to futures trading. One pip is the smallest price increment change that can occur to the left of the decimal point. For example, the Adidas AG futures price could change from 123.91 to 124.91, which corresponds to a one pip price change. If the crude oil price changes from 84.58 to 85.58, that will be one point. There is a dollar value attached to each movement point, but the exact value depends on the exchange.

Ticks

The point consists of ticks, which are price movements that occur on the right side of the decimal point when viewing the price of a futures contract. A tick is the smallest possible price change as measured by the markets. Markets have different tick sizes and the value of each tick depends on the futures contract. The tick size determines how many ticks it takes to increase the point.

Pips

A pip refers to the price movement of a currency pair. A move point occurs every time the fourth decimal place of the price moves one unit. This applies to all currency pairs except those containing the Japanese Yen. For example, if the EURUSD currency pair moves from 1.0395 to 1.0396, this amounts to one point of movement.

For currency pairs containing JPY, one point of movement corresponds to the second decimal place. If CAD/JPY moves from 104.53 to 104.54, this means a one pip move.

Forex brokers sometimes offer fractional pip prices, which means that the fifth decimal place is often quoted. If the EURUSD price moves from 1.03953 to 1.03963, this is one point of movement. If the price moves from 1.03953 to 1.03958, then it has moved only half a point. There are 10 fractional points in one whole point.

How much money a move pip is worth, referred to as "pip value", depends on the currency pair being traded. For pairs where the US dollar is listed second, such as GBP/USD, the value of each pip is fixed at $10 per $100,000 traded. For pairs where the US dollar is not listed second, or if the trader does not use a US dollar account, the pip value fluctuates.

What is a Pipette

Pipettes are 1/10 (one tenth) of a pip.

One point equals ten pipettes. Pipettes are also known as glasses.

1 pip = 10 pipettes

• For example, 200 points = 2000 points.

A pip is used to calculate a 4-digit decimal value in currency pairs.

• Example: 0.1234

Pipettes are used to calculate the 5 digit decimal value in currency pairs.

• Example: 0.12345

Traders often use pips to indicate their profits and losses in Forex trading.

How to Calculate Pip Value

In Forex, 1 pip always corresponds to the monetary equivalent, and when calculating potential profit or loss, the trader also always converts points into dollars. This can be done both independently and with the help of special tools in automatic mode. For direct quotes, that is, where the US dollar is in first place in the pair, the cost of a point will be calculated by the formula:

Lot Size * Point Size / Current Quote

When opening a buy trade with a volume of 0.1 lot (10,000 base currency) on the USDCHF pair with a current rate of 0.9951, the pip will be equal to $1 (10,000 * 0.0001/0.9951 = $1.0049, rounded up to one).

If the price of a currency instrument increases by 50 points, then the trader will earn $50, and if the trade is closed by a stop loss set at a distance of 30 points, then his loss will be $30.

Things are a little different with the calculation of the cost of a pip for pairs with a reverse quote (the dollar is in second place) or cross rates (where the dollar is absent). For reverse quotes, 1 point with a transaction volume of 0.1 lot will always equal 1 dollar, regardless of the current exchange rate, and the formula for calculating the value of a point will look like this: point size * transaction volume. It is on this forum that the cost of a pip is calculated for the most popular currency pair - EURUSD.

To calculate the cost of a point in cross rates, since the formula here is not the simplest and looks like this: point size * transaction volume * current price of the base currency against the US dollar / current exchange rate of the currency pair (cross rate), Forex will be an especially useful calculator, which we will talk about a little later.

So, when making a deal with a lot of 0.1 for the GBP/CHF pair with a current price of 1.3015, 1 pip will be equal to 10,000*0.0001*1.3081 (the current GBPUSD rate)/1.3015 = 1.0051 dollars, which is rounded up to 1.

Remember how many pips are in one pip - 10, which means that if necessary, we can calculate the cost of one pip by dividing the pip price by 10.

Pip Value Calculation Formula

Here are the steps

• Determine the pip size. It is 0.0001 for all currency pairs other than those that contain the Japanese yen when it is 0.01 due to the relatively low value of the Japanese yen.
• Determine the exchange rate.

• Use this general formula for calculating the pip value for a particular position size:

  Pip value = (pip size / exchange rate) x position size

• Convert the pip value into your accounting currency using the prevailing exchange rate.

Pip Example

If EUR/USD moves from 1.03954 to 1.03964, that .0001 USD rise in value is 1 Pip.

Here is an example to figure out what a 1 pip change would look like for EUR/USD pair.

In Forex pips are usually the last decimal place of a price quote. Most pairs go out to 4 decimal places, but there are some exceptions like Japanese yen pairs (they go out to two decimal places).

For example, for EUR/USD, it is 0.0001, and for USD/JPY, it is 0.01.

Bottom line on What is a Pip

You must know the pip value to know the risk of each of your trading positions. The pip value is useful for both short-term and long-term trading. Note that in JPY pairs, points are considered second after the decimal point in price quotes. But in other pairs in price quotes, pips are counted from the fourth decimal place.

The main thing to take away from this material is the definition of pips and understanding what affects their value. This is necessary at least in order to evaluate the result of the transaction in the deposit currency. You are unlikely to conduct manual calculations, this makes no sense if you have online calculators. Considered this question in detail for a better understanding of the theory.

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