Understanding Pips in Forex Trading

What exactly is a pip?

In the forex trading world, you’ll often hear terms like “pips,” “pipettes,” “lots,” and “points.” Here, we’re going to clarify these terms and demonstrate how to calculate their values, involving a bit of math.

Grasping Pips in Forex

This information is crucial for all forex traders. Don’t start trading until you’re confident with pip values and how they influence profit and loss calculations.

Defining a Pip

A pip represents the smallest measure used to express changes in value between two currencies.

For example, if the EUR/USD pair moves from 1.1050 to 1.1051, the .0001 USD increase is considered ONE PIP.

Pips are typically shown as the last decimal place in a currency pair’s price quote.

Most currency pairs are priced to four decimal places, except for pairs involving the Japanese yen, which are priced to two decimal places. For EUR/USD, the pip size is 0.0001, while for USD/JPY, it’s 0.01.

Understanding Pipettes

Some forex brokers quote currency pairs to an extra decimal place beyond the standard “4 and 2” places. These are known as FRACTIONAL PIPS or “pipettes.”

If you’re puzzled by the term “pip,” prepare for more confusion with “pipettes,” equal to a “tenth of a pip.”

For instance, a move from 1.30542 to 1.30543 in GBP/USD is a .00001 USD increase or ONE PIPETTE.

On trading platforms, fractional pips are shown to the right of the standard decimal places.

Calculating Pip Value

The value of a pip varies between currency pairs because each has a different relative value.

Let’s explore this with a quote using 4 decimal places.

For simplification, exchange rates in examples will be shown as a ratio (e.g., EUR/USD at 1.2500 will be “1 EUR / 1.2500 USD”)

Example #1: USD/CAD = 1.0200, interpreted as 1 USD to 1.0200 CAD

Pip value calculation: [.0001 CAD] x [1 USD/1.0200 CAD] or [.0001 CAD / 1.0200 CAD] x 1 USD = 0.00009804 USD per unit

For a 10,000 unit trade of USD/CAD, a one pip change alters the trade value by approximately 0.98 USD.

Example #2: GBP/JPY = 123.00, demonstrating a pair with the yen as the counter currency

Pip value calculation: [.01 JPY] x [1 GBP/123.00 JPY] or [.01 JPY / 123.00 JPY] x 1 GBP = 0.0000813 GBP

For 10,000 units of GBP/JPY, a one pip move changes the value by roughly 0.813 GBP.

Determining Pip Value in Your Account Currency

To calculate the pip value in your account currency, simply multiply/divide the “found pip value” by the exchange rate between your account currency and the currency in question.

If converting to the account’s base currency, multiply the found pip value by the exchange rate. If converting to the counter currency, divide the pip value by the exchange rate.

For example, converting .813 GBP per pip to USD using GBP/USD at 1.5590: .813 GBP per pip / (1 GBP/1.5590 USD) = 1.2674 USD per pip move.

To find the value in another currency, like NZD, using the USD/CAD example: 0.98 USD per pip x (1 NZD/.7900 USD) = 1.2405 NZD per pip move.

Though it may seem daunting, most forex brokers automatically calculate pip values. However, understanding the calculation process is beneficial.