Pips in forex trading stands for percentage in points. A pip measures the small price change of an exchange rate worth less than one unit of currency.
How much is a pip worth in forex trading?
Because exchange rates are quoted in several decimal points, it was necessary to give a name to these small incremental moves.
If you think of an exchange rate valued in dollars and cents, the cent would be the second decimal place. The pip is typically the fourth decimal place of the currency pair.
EUR/USD = 1.15 (5 is the cent)
This is saying one euro equals one US dollar and thirty-five cents.
However, in forex markets, EUR/USD is quoted with four or five decimal places.
EUR/USD = 1.1542 (2 is the pip)
In this instance, the ‘2’ is the pip
Fractional pips
Modern forex brokers use fractional pips take the exchange rate to an even more detailed price. A fractional pip is 1/10th the value of a full pip.
EUR/USD = 1.15421 (1 is the fractional pip)
What does 100 pips mean?
The reason it is important to understand what pips do in forex is how you target where to take profits or cut losses in your forex trades.
For example,
If you Buy EUR/USD at 1.1542 and sell at 1.1543 – you have made 1 pip profit
If you buy EUR/USD at 1.1542 and sell at 1.1552 – you have made 10 pips profit
If you buy EUR/USD at 1.1542 and sell at 1.1642 – you have made 100 pips profit
What is a pip in USD/JPY?
There is an exception to the rule of a pip being the fourth decimal place for a forex pair – that is for Japanese yen pairs such as USD/JPY.
For USD/JPY – the pip is the second decimal place, because it is a much weaker currency.
For example: A move in USD/JPY from 108.90 to 108.91 is 1 pip.
How do you calculate pips in forex?
The value of a pip varies according to which currencies are in the currency pair that you are trading – and on which position the currency is – whether it is the base currency or the quote currency. Once you have calculated the pip value, you then need to consider your trade size to calculate how much a pip is worth in each particular trade. We will go step by step through whole process next:
How to calculate the pip value
We will look at two examples, one with the USD as the base currency and one with the USD as the quote (or counter) currency.
Example pip calculation with USD as base currency (EUR/USD)
This is the easiest to remember because one pip is always worth $1 per $10,000 traded and $10 per $100,000 traded. That is because the currency is being quoted in dollars, for example GBP/USD is how much a pound is worth in dollars.
PIPS VALE FORMULA 1:
Size of a pip x Position size = pip value
1 pip x $10,000 euros = 1 USD
Now if you were to buy 10,000 euros with EUR/USD at 1.1542 and if each pip is worth $1 and you sold at 1.1552 to make 10 pips, you just made a $10 profit. Likewise if the price fell 10 pips to 1.1532, you would make a 10 pip loss.
If your account were based in a different currency like Swiss francs, you would use the USD/CHF exchange rate to convert back to francs to know the profit in your local currency.
Example pip calculation with USD as quote currency (USD/JPY)
Here the value of the US dollar is being quoted in a foreign currency, so the value of each pip will be in the foreign currency and needs converting back to US dollars to understand the value of the pip in dollars.
PIPS VALUE FORMULA 2:
Size of a pip / (Exchange rate x Position size) = Pip value
1 pip / (108.90 x 10,000) = 0.92 USD
If you were to buy 10,000 dollars with USD/JPY at 108.90 and each pip is worth $0.92 and you sold at 109.10 then you would have made 20 pips x $0.92 = $18.35. Equally, were you have sold at 108.70 for a 20 pip loss, you would have lost $18.35.
Pips for practical purposes in forex trading
In real life trading – the online trading platform will calculate the pip value for you so all this maths is not needed on a regular basis, but the understanding of how it all works behind the software is key to learning to trade and having a good money management system.
