June 06, 2022 - 02:45 PM 410 views
A "pip" is a unit of measurement used to describe the difference in value between two currencies.
A .0001 USD increase in value equals ONE PIP if EUR/USD increases from 1.1050 to 1.1051.
The last decimal place of a pricing quote is commonly referred to as a pip.
There are rare outliers, such as Japanese yen pairs, which go to four decimal points (they go out to two decimal places).
For example, it is 0.0001 for EUR/USD and 0.01 for USD/JPY.
There are forex brokers who quote currency pairings to "5 and 3" decimal places instead of the typical "4 and 2" decimal places.
They're referring to FRACTIONAL PIPS, which are also known as "points" or "pipettes."
If the concept of a "pip" isn't perplexing enough for a rookie forex trader, let us add to the confusion by pointing out that a "point," "pipette," or "fractional pip" equals a "tenth of a pip."
For example, a.00001 USD move higher in GBP/USD from 1.30542 to 1.30543 is ONE PIPETTE.
The digit signifying a tenth of a pip is commonly shown to the right of the two larger numbers on trading platforms.
Here's a "map" of pips to assist you understand how to read them...
How Pip Value is
Because each currency has its own relative value, the value of a pip must be calculated for each currency pair.
We'll use a quote with four decimal places in the following example.
Exchange rates will be expressed as a ratio to make the computations easier to understand (for example, EUR/USD at 1.2500 will be written as "1 EUR / 1.2500 USD").
Example #1: USD/CAD = 1.0200
1 USD is read as 1.0200 CAD (or 1 USD/1.0200 CAD)
(The change in the value of the counter currency) divided by the exchange rate ratio equals the pip value (in terms of the base currency)
[.0001 CAD] x [1 USD/1.0200 CAD]
Or in simple terms
[(.0001 CAD) / (1.0200 CAD)] x 1 USD = 0.00009804 USD per unit traded
If we traded 10,000 units of USD/CAD in this example, a one-pip movement in the exchange rate would result in a position value change of 0.98 USD (10,000 units x 0.00009804 USD/unit).
We say "roughly" because the value of each pip alters as the exchange rate changes.
Example #2: GBP/JPY = 123.00
Another currency pair with the Japanese Yen as the counter currency is shown below.
It's worth noting that this currency pair only measures a 1 pip change in value to two decimal places (most of the other currencies have four decimal places).
A one-pip move in this situation would be.01 JPY. (The change in the value of the counter currency) divided by the exchange rate ratio equals the pip value (in terms of the base currency)
[.01 JPY] x [1 GBP/123.00 JPY]
Or in simple terms
[(.01 JPY) / (123.00 JPY)] x 1 GBP = 0.0000813 GBP
Hence, while trading the 10,000 units of the GBP/JPY currency pair, each pip value change is roughly 0.813 GBP.
"What is the pip value in terms of my trading account's currency?" is the final question to ask when determining the pip value of your position.
After all, it's a worldwide marketplace, and not everyone's account is in the same currency.
This means that the pip value must be converted to the currency in which our account is traded.
The simplest method is to multiply or divide the "discovered pip value" by the exchange rate between your account currency and the currency in question.
If the currency of the "discovered pip value" is the same as the base currency in the exchange rate quote:
Let's use the GBP/JPY example above to convert the found pip value of.813 GBP to the pip value in USD using the GBP/USD exchange rate ratio of 1.5590.
Simply divide the "discovered pip value" by the corresponding exchange rate ratio if the currency you're converting to is the exchange rate's counter currency:
.813 GBP per pip / (1 GBP/1.5590 USD)
[(.813 GBP) / (1 GBP)] x (1.5590 USD) = 1.2674 USD per pip move
The value of a 10,000 unit stake varies by approximately 1.27 USD for every .01 pip shift in GBP/JPY.
If the base currency of the conversion exchange rate ratio is the currency you're converting to, multiply the "discovered pip value" by the conversion exchange rate ratio.
We wish to find the pip value of .98 USD in New Zealand Dollars using the USD/CAD example above. As a conversion exchange rate ratio, we'll use.7900:
0.98 USD per pip X (1 NZD/.7900 USD)
[(0.98 USD) / (.7900 USD)] x (1 NZD) = 1.2405 NZD per pip move
Your 10,000 unit position changes in value by approximately 1.24 NZD for every .0001 pip movement in USD/CAD from the example above.
Despite the fact that you're now a math genius–at least when it comes to pip values–you're probably rolling your eyes and wondering, "Do I really need to sort this out?"
The answer is a resounding NO. Almost all forex brokers will do all of this for you automatically, but it's always a good idea to understand how they do it.
Don't be concerned if your broker does not do so. You can use our Pip Value Calculator to figure out how much your pip is worth.
We'll talk about how these seemingly little amounts can add up in the future lesson.
Read More Article:
Learn to Trade with Best and Trusted Global Broker
Start your journey with us and learn from basic to advance with one to one training session. Get full knowledge about the market from our expert team and become expert in market.
Free Enquiry Now: Click Here