What is a Pip in Forex and how to calculate it?

S

ome say that the term pip originally comes from the word percentage, but this may be a case of false etymology. Others argue that pip means "Price Interest Point".

If you are interested in Forex trading and regularly read analyzes or comments about the foreign exchange market, you will probably come across the terms pip or pips. This is because pip is a very common term in the Forex trading market. 

In this article, we will answer two main questions: what is a pip and how much is a 1 pip?

What is a pip?

Simply put, the pip is the standard unit for measuring how much the currency exchange rate has changed.

Traditionally, currency prices have been quoted in a certain number of decimal places. 

Most often, four decimal places and initially a pip is a one-point movement of the fourth decimal place.

Let’s look at the following example:

EUR/USD moves from 1.1990 to 1.1991, ONE PIP will be that rise in the value of 0001 USD

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.

Due to that fact that pip remains a standardized value for all brokers and platforms, it makes it very useful as a measure that allows traders to always communicate in the same conditions without confusion. 

Without such a specific unit, there is a risk of comparing apples to oranges when talking about more general concepts such as points or tics.

What is Pipette?

You will often find yourself on a trading platform that quotes currency pairs outside the standard 4 and 2 decimal places.

This 5th (or 3rd like in Yen’s example) decimal places are what we call PIPETTES, also called “points” or “fractional pips”.

If you think that you see clearly what is a pip as a new forex trader, let’s see if you can get what exactly is called a pipette.

“Pipette” or “Point or “Fractional pips” is equal to a “tenth of a pip“.

We will use the example above, but it will change furthermore.

If EUR/USD moves from 1.19942 to 1.19943, ONE PIPETTE will be that rise of .00001 USD.

Fractional Pip

Usually, the digit representing a tenth of a pip appears to the right of the two larger digits in most of the trading platforms. 

How to Calculate the Value of a Pip or How much is 1 pip?

In most currency pairs, 1 pip is the movement of the fourth digit after the decimal point. 

The most significant exceptions for Forex pairs involve the Japanese yen (JPY). For JPY pairs, 1 pip is the second digit after the decimal point.

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

Multiplying the size of the position by one pip will allow the trader to understand its price per 1 pip.

In the following examples, we will use a quote with 4 decimal places.

For a clearer vision of the calculations, we will put the exchange rates as a ratio, meaning that GBP/USD at 1.3600 will be written as “1 GBP / 1.3600 USD”. 

Example №1: USD/SGD = 1.3300

You will read as 1 USD to 1.3300 SGD (or 1 USD/1.3300 SGD)

Described with words the calculation will look like this: The value change in counter currency times the exchange rate ratio = pip value (in terms of the base currency)

[.0001 SGD] x [1 USD/1.3300 SGD]

Or simply as:

[(.0001 SGD) / (1.3300 SGD)] x 1 USD = 0.000075188 USD per unit traded

If we take this example and decide to trade 10,000 units of USD/SGD, then a one pip change to the exchange rate would be approximately a 0.75 USD change in the position value, calculated by the formula (10,000 units x 0.00007518  USD/unit).

Example №2 : GBP/JPY = 144.00

Let’s try and use as an example a currency pair with the Japanese Yen as the counter currency.

DON’T GET CONFUSED! 

This currency pair only goes to two decimal places to measure a 1 pip change in value in comparison with the other currencies, which have four decimal places. In this case, a one pip move would be .01 JPY.

The formula, described with words will be: (The value change in counter currency) times the exchange rate ratio = pip value (in terms of the base currency)

[.01 JPY] x [1 GBP/144.00 JPY]

Or simply as:

[(.01 JPY) / (144.00 JPY)] x 1 GBP = 0.00006944 GBP

Again you decide to trade 10,000 units of GBP/JPY, each pip change in value is worth approximately 0.6944 GBP.

Find the Pip Value in Your Trading Account’s Currency

Don’t forget that people are living and trading all around the world, meaning that not all of the accounts are in the same currency. 

So the pip value will have to be translated to whatever currency our account may be traded in.

This calculation is probably the easiest of all; simply multiply/divide the “found pip value” by the exchange rate of your account currency and the currency in question.

If the “found pip value” currency is the same currency as the base currency in the exchange rate quote:

We will use the example above GBP/JPY and will convert the found pip value into pip value in USD.

Why don’t you try it by yourself, first?

Convert the found pip value of .6944 GBP to the pip value in USD by using GBP/USD at 1.3675 as our exchange rate ratio.

If the currency you are converting to is the counter currency of the exchange rate, all you have to do is divide the “found pip value” by the corresponding exchange rate ratio:

ANSWER:  .6944 GBP per pip / (1 GBP/1.3675 USD)

Or

[(.6944 GBP) / (1 GBP)] x (1.3675 USD) = 0.9495 USD per pip move

So, for every .01 pip move in GBP/JPY, the value of a 10,000 unit position changes by approximately 0.9495 USD.

If the currency you want to convert to is the base currency of the exchange rate ratio, you have to multiply the “found pip value” by the conversion exchange rate ratio.

Let’s try our other example. Using USD/SGD, we want to find the pip value of .75 USD in New Zealand Dollars. We’ll use .7200 as our conversion exchange rate ratio:

ANSWER:   0.72 USD per pip X (1 NZD/.7200 USD)

Or

[(0.75 USD) / (.7200 USD)] x (1 NZD) = 1.0416 NZD per pip move

For every .0001 pip move in USD/SGD from the example above, your 10,000 unit position changes in value by approximately 1.04 NZD.

We know that not all of us are Einstein, so this might have come a little bit hard for you to understand. 

But don’t worry. Almost every forex broker will do this math for you, so you can focus just on what to trade! 

In the next lesson, we will discuss how these seemingly insignificant amounts can add up.

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