What Is a Pip?
“Pip” is an acronym for percentage in point or price interest point. A pip is the smallest whole unit price move that an exchange rate can make, based on forex market convention.
Most currency pairs are priced out to four decimal places and a single pip is in the last (fourth) decimal place. A pip is thus equivalent to 1/100 of 1% or one basis point.
For example, the smallest whole unit move the USD/CAD currency pair can make is $0.0001 or one basis point.
Understanding Pips
A pip is a basic concept of foreign exchange (forex). Forex traders buy and sell a currency whose value is expressed in relation to another currency. Quotes for these forex pairs appear as bid and ask spreads that are accurate to four decimal places.
Movement in the exchange rate is measured by pips. Since most currency pairs are quoted to a maximum of four decimal places, the smallest whole unit change for these pairs is one pip.
Calculating Pip Value
The value of a pip depends on the currency pair, the exchange rate and the trade value. When your forex account is funded with U.S. dollars and USD is the second of the pair (or the quote currency), such as with the EUR/USD pair, the pip is fixed at .0001.
In this case, the value of one pip is calculated by multiplying the trade value (or lot size) by 0.0001. So, for the EUR/USD pair, multiply a trade value of, say, 10,000 euros by .0001. The pip value is $1. If you bought 10,000 euros against the dollar at 1.0801 and sold at 1.0811, you’d make a profit of 10 pips or $10.
On the other hand, when the USD is the first of the pair (or the base currency), such as with the USD/CAD pair, the pip value also involves the exchange rate. Divide the size of a pip by the exchange rate and then multiply by the trade value.
For example, .0001 divided by a USD/CAD exchange rate of 1.2829 and then multiplied by a standard lot size of 100,000 results in a pip value of $7.79. If you bought 100,000 USD against the Canadian dollar at 1.2829 and sold at 1.2830, you’d make a profit of 1 pip or $7.79.
Japanese yen (JPY) pairs are quoted with 2 decimal places, marking a notable exception to the four decimal place rule.
For currency pairs such as the EUR/JPY and USD/JPY, the value of a pip is 1/100 divided by the exchange rate. For example, if the EUR/JPY is quoted as 132.62, one pip is 1/100 ÷ 132.62 = 0.0000754. With a lot size of 100,000 euros, the value of one pip (in USD) would be $7.54.
Pips and Profitability
The movement of the exchange rate of a currency pair determines whether a trader makes a profit or loss at the end of the day. A trader who buys the EUR/USD will profit if the euro increases in value relative to the U.S. dollar. If the trader bought the euro for 1.1835 and exited the trade at 1.1901, they would make 66 pips on the trade (1.1901 – 1.1835).
Now, let’s consider a trader who buys the Japanese Yen by selling the USD/JPY pair at 112.06. The trader loses 3 pips on the trade if they close out the position at 112.09. They profit by 5 pips if they close it out at 112.01.
While the difference may look small, in the multi-trillion dollar foreign exchange market, gains and losses can add up quickly. For example, on a $10 million position that closed at 112.01, the trader would make ¥500,000. In U.S. dollars, that’s $4,463.89 ( ¥500,000/112.01).
Real-World Examples of Pip
A combination of hyperinflation and devaluation can push exchange rates to the point where they become unmanageable. In addition to impacting consumers who are forced to carry large amounts of cash, this can make trading unmanageable and the concept of a pip loses meaning.
A well-known historical example of this took place in Germany’s Weimar Republic, when the exchange rate collapsed from its pre-World War I level of 4.2 marks per dollar to 4.2 trillion marks per dollar in November 1923.
Another case in point is the Turkish lira, which reached a level of 1.6 million per dollar in 2001, which many trading systems could not accommodate.
The government eliminated six zeros from the exchange rate and renamed it the new Turkish lira. As of January 2021, the average exchange rate stands at a more reasonable 7.3 lira per dollar.
What’s a Pip?
A pip is the smallest whole unit measurement of the difference between the bid and ask spread in a foreign exchange quote. A pip equals 1/100 of 1%, or .0001. Thus, the forex quote extends out to four decimal places. Smaller price increments are measured by fractional pips. A fractional pip is 1/10 of a pip.
How Are Pips Used?
They are a part of a currency pair’s exchange rate market quote. Pips represent the change in the quote and value of a position in the market you may have taken. Say, hypothetically, you bought a currency pair for 1.1356 and sold it for 1.1360. You made 4 pips on your trade. You’d have to then calculate the value of a single pip and multiply that by your lot size for the dollar value of your profit.
Does the Japanese Yen Forex Rate Use Pips?
Yes, it does. However, the yen is an exception. A quote for the yen normally extends two decimal places past the decimal point. So, a single whole unit pip is .01 rather than the .0001 for other currency pairs.
What’s a pip?
You’ve probably heard of the terms “pips,” “points“, “pipettes,” and “lots” thrown around, and now we’re going to explain what they are and show you how their values are calculated.
Here is where we’re going to do a little math. Just a little bit.
Learn About Pips in Forex
Take your time with this information, as it is required knowledge for all forex traders.
Don’t even think about trading until you are comfortable with pip values and calculating profit and loss.
What the heck is a Pip?
The unit of measurement to express the change in value between two currencies is called a “pip.”
If EUR/USD moves from 1.1050 to 1.1051, that .0001 USD rise in value is ONE PIP.
A pip is 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.
Pip
What is a Pipette?
There are forex brokers that quote currency pairs beyond the standard “4 and 2” decimal places to “5 and 3” decimal places.
They are quoting FRACTIONAL PIPS, also called “points” or “pipettes.”
If the concept of a “pip” isn’t already confusing enough for the new forex trader, let’s try to make you even more confused and point out that a “point” or “pipette” or “fractional pip” is equal to a “tenth of a pip“.
For instance, if GBP/USD moves from 1.30542 to 1.30543, that .00001 USD move higher is ONE PIPETTE.
Pipette
Here’s how fractional pips look like on a trading platform:
Fractional Pip
On trading platforms, the digit representing a tenth of a pip usually appears to the right of the two larger digits.
Here’s a pip “map” to help you to learn how to read pips…pip cheat sheet
How to Calculate the Value of a Pip
As each currency has its own relative value, it’s necessary to calculate the value of a pip for that particular currency pair.
In the following example, we will use a quote with 4 decimal places.
For the purpose of better explaining the calculations, exchange rates will be expressed as a ratio (i.e., EUR/USD at 1.2500 will be written as “1 EUR / 1.2500 USD”)
Example #1: USD/CAD = 1.0200
To be read as 1 USD to 1.0200 CAD (or 1 USD/1.0200 CAD)
(The value change in counter currency) times the exchange rate ratio = pip value (in terms of the base currency)
[.0001 CAD] x [1 USD/1.0200 CAD]
Or simply as:
[(.0001 CAD) / (1.0200 CAD)] x 1 USD = 0.00009804 USD per unit traded
Using this example, if we traded 10,000 units of USD/CAD, then a one pip change to the exchange rate would be approximately a 0.98 USD change in the position value (10,000 units x 0.00009804 USD/unit).
We say “approximately” because as the exchange rate changes, so does the value of each pip move.
Example #2: GBP/JPY = 123.00
Here’s another example using a currency pair with the Japanese Yen as the counter currency.
Notice that this currency pair only goes to two decimal places to measure a 1 pip change in value (most of the other currencies have four decimal places). In this case, a one pip move would be .01 JPY.
(The value change in counter currency) times the exchange rate ratio = pip value (in terms of the base currency)
[.01 JPY] x [1 GBP/123.00 JPY]
Or simply as:
[(.01 JPY) / (123.00 JPY)] x 1 GBP = 0.0000813 GBP
So, when trading 10,000 units of GBP/JPY, each pip change in value is worth approximately 0.813 GBP.
How to Find the Pip Value in Your Trading Account’s Currency
The final question to ask when figuring out the pip value of your position is, “What is the pip value in terms of my trading account’s currency?”
After all, it is a global market and not everyone has their account denominated in the same currency.
This means that 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:
Using the GBP/JPY example above, let’s convert the found pip value of .813 GBP to the pip value in USD by using GBP/USD at 1.5590 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:
.813 GBP per pip / (1 GBP/1.5590 USD)
Or
[(.813 GBP) / (1 GBP)] x (1.5590 USD) = 1.2674 USD per pip move
So, for every .01 pip move in GBP/JPY, the value of a 10,000 unit position changes by approximately 1.27 USD.
If the currency you are converting to is the base currency of the conversion exchange rate ratio, then multiply the “found pip value” by the conversion exchange rate ratio.
Using our USD/CAD example above, we want to find the pip value of .98 USD in New Zealand Dollars. We’ll use .7900 as our conversion exchange rate ratio:
0.98 USD per pip X (1 NZD/.7900 USD)
Or
[(0.98 USD) / (.7900 USD)] x (1 NZD) = 1.2405 NZD per pip move
For every .0001 pip move in USD/CAD from the example above, your 10,000 unit position changes in value by approximately 1.24 NZD.
Even though you’re now a math genius–at least with pip values–you’re probably rolling your eyes back and thinking, “Do I really need to work all this out?”
Well, the answer is a big fat NO. Nearly all forex brokers will work all this out for you automatically, but it’s always good for you to know how they work it out.
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- Warren Buffett
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