What is a pip in Forex?

Last Updated on September 19, 2021 by Alphaex Capital
What is a pip in Forex

It’s time to understand some more forex lingo.

This time, it’s understanding what everyone talks about when they win or lose a trade.

Pips… But what is a pip?

In this article, you’ll discover these tiny numbers, what they mean for your trading, and how to use them.

Let’s check it out:

What is a pip in forex trading?

From time to time as you are learning the lingo of forex trading for beginners you may have come across a small word, called pip.

A pip is the lowest value quoted in a currency pair.

It is how much a currency pair goes up and down by.

Traders refer to a pip when they talk about profits and losses when trading as it standardises their results with others.

The true meaning of pip is that it stands for percentage in point.

The value of a pip is the 4th digit after the decimal.

Or to make it simple:

In most cases, a pip is the last number you see on a forex quote.

This is because the forex rates are measured in ten thousandths of a unit.

For example:

if the Euro costs $ 1.1324, that means it costs one dollar and 13.24 cents.

Making a profit on forex trading means watching the fluctuations of pips.

Continuing the example from above, if the price of the Euro were to change to 1.1330, it would have risen by 6 pips.

1.1324

+6 pips

1.1330

Conversely, if it had dropped to 1.1320, it would have dropped by 4 pips.

1.1324

-4 pips

1.1320

This is how traders talk when they make a profit or lose a trade.

Quite easy, isn’t it?

Don’t be fooled though.

In forex, you may be dealing with tiny digits but you are also dealing with heavy leveraged products that require margins.

So just 10 of these tiny pips on a leveraged account could make or break you.

How to Calculate the Value of a Pip

I rule of thumb is to base how much value of a pip is based on the EUR/USD conversion – roughly $10 per pip per lot.

However, each pair have their own true value and it is important to understand what they are roughly so your risk management is more accurate.

For example, the GBP/USD is 1.4000; which translates to for every £1 GBP to $1.40 USD.

To calculate this we use the expression below:

Value Increment In The Currency Pair (1 pip) / Exchange Rate * 1 Base Rate = Pip value in base currency.

To put this into our example:

Value Increment In Currency (1 pip/0.0001) / Exchange Rate (1.4000) * 1 Base Rate = Pip value in base currency.

=

(0.0001/1.4000)*1 = 0.00007143 per unit traded.

(Now, we discuss what units are later on in our “What Is A Lot” lesson)

So, if we traded 1 lot the value per pip would be:

0.00007143 * 100,000 = £7.14 change per pip. So every time the GBP/USD moves, the value is roughly £7.14 per pip.

So if it goes up 10 pips that is an increase of £71.40.

If it goes down 10 pips that is a decrease of £71.40.

Another example we should use is with the Japanese Yen as the pip is only two decimal points in.

USD/JPY – in this example, a one pip move is only 0.01 move.

For example, the USD/JPY is 114.30; which translates to for every £1 USD to $114.30 JPY.

To calculate this we use the expression below:

Value Increment In Currency (1 pip) / Exchange Rate * 1 Base Rate = Pip value in base currency.

To put this into our example:

Value Increment In Currency (1 pip/0.01) / Exchange Rate (114.30) * 1 Base Rate = Pip value in base currency.

=

(0.01/114.30)*1 = 0.0000875 per unit traded.

So, if we traded 1 lot the value per pip would be:

0.0000875 * 100,000 = $8.75 change per pip. So every time the USD/JPY moves, the value is roughly $8.75 per pip.

So if it goes up 10 pips that is an increase of $87.50.

If it goes down 10 pips that is a decrease of $87.50.

It’s as easy as that!

How to convert the pip value into your currency

Not everyone has the same currency in their trading account.

If you are from the UK, you will not be trading from your account using US Dollars by default.

If you are from the US you will not be trading in Euros by default either.

As there are lots of forex pairs, when you work out the pip value – you need to then convert that to how much that actually means to your trading account.

Knowing the pip value is $10 per pip is great, but what is that in GBP??

To do that is easy:

Simply grab the respective pair and then convert the pip value into your account value.

For example:

You have $10 per pip value.

You want to find out what that means in GBP.

You load up the price of GBP/USD and see that it is trading at 1.3400

Next, you divide 10 by 1.3400.

Which gives you £7.46.

That would now give you a pip value of £7.46 related to your base account currency.

Because we wanted GBP and had dollars, we divided the values to get what we want.

Let’s do another example:

This time you know your account is traded in Yen.

However, you are trading the EUR/USD and it has a pip value of $10.

To get the pip value of your base currency you load up the chart for USD/JPY which is trading at 110.18.

Now to get the value in yen you times 10 by 110.18 which gives you 1,101.80 JPY per pip.

Because we wanted Yen and had dollars, we then times both values to get what we want.

What is a Pipette?

These annoying things have stormed the forex quotes from brokers out of nowhere.

These are a fraction of a pip, which are also called points.

Pipettes are 1/10 of a pip.

You will see the pipette quoted at 5 decimal places & usually noted by a smaller digit next to the pip.

An example of a pipette would be the following:

EURUSD: 1.11715

The 5 is a pipette.

Honestly, I can’t stress how worthless this extra pipette is.

If you use TradingView you can adjust your charts to format it to pips and save yourself some quote space.

To be honest, they are not worth following and I’d get your broker to see if they can get your account quoting in pips, not pipettes.

However, each to their own – for some reason traders like seeing this digit.

Now you know what is a pip in forex trading and how to find the value of a pip easily.

Fortunately, thanks to technology and services offered by brokers nowadays, you don’t have to formulate these anymore.

They are already done within your account so you don’t have to waste time with a calculator on this!

If you found value in this article, then you may love some of the other articles below:

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