What is a Pip? In this Wiki, we will explore what a pip is and how it is calculated using multiple examples.
What is a Pip?
Pip
A pip is the smallest unit of price for any currency. Most currency pairs consist of 5 significant digits and most pairs have the decimal point immediately after the first digit, that is, EUR/USD equals 1.1138. In this instance, a single pip equals the smallest change in the fourth decimal place which is 0.0001. Therefore, if the quote currency in any pair is USD, then one pip always equal 1/100 of a cent.
The Japanese Yen is a bit different where one pip equals 0.01 and is typically quoted in 3 decimal places instead of the normal 5. For example, if you have a long (buy) position in the USD/JPY pair at a price of 121.350 and it went up to 121.450 then this would be a net gain of 10 pips (121.450 - 121.350 = 0.10 or 10 pips).
Pipette
A pipette is one-tenth of a pip. Some brokers quote fractional pips, also called pipettes, for added precision in quoting rates. For example, if EUR/USD moved from 1.11156 to 1.11157, it moved 1 pipette or a tenth of a pip 1.11157 - 1.11156 = 0.00001).
One thing to keep in mind is that there are many brokers, in fact, most brokers, which quote currency pairs beyond the old standard “4 and 2″ decimal places to the now more standard “5 and 3″ decimal places. These “5 and 3” decimal places are called “fractional pips” or “pipettes.”
Calculating Pip Values
Now that we know what a Pip and a Pipette are an explanation of how their values are calculated is appropriate. This is academic in nature and is not something that you will need to do before placing every single trade. The purpose is to give you a broad-stroke understanding of how the Forex market works. It is pretty dry stuff but is some knowledge that all Forex traders should acquire so that they understand the mechanics of the market.
As each currency has its own relative value, it becomes necessary to calculate the value of a pip for that particular currency pair. In the following example, we will use a quote with 5 decimal places because this is the convention that most currency brokers currently use.
For the purpose of better explaining the calculations in this demonstration, exchange rates will be expressed as a ratio, i.e., the EUR/USD at 1.12500 will be written as “1 EUR/ 1.12500 USD.” You may also look at this as 1 EUR = 1.12500 USD or it takes $1.12500 USD to buy 1 EUR.
NOTE: The "Base Currency" is the first currency in the pair and the "Counter Currency" is the second currency in the pair.
Examples of Exchange Rate Ratio
USD/CAD = 1.22500. To be read as 1 USD to 1.22500 CAD (or 1 USD/1.22500 CAD). The value change in counter currency (CAD) times the exchange rate ratio = pip value in terms of the base currency ( USD).
[.00010 CAD] x [1 USD/1.22500 CAD]
Or Simply
[(.00010 CAD) / (1.22500 CAD)] x 1 USD = 0.00008 USD per unit traded.
Using this example, if we traded 10,000 units (1 mini lot) of USD/CAD, then a one pip change to the exchange rate would be approximately a $0.80 USD change in the position value (10,000 units x 0.00008 USD/unit). We use “approximately” because as the exchange rate changes and so does the value of each pip move.
The following is another example using a currency pair with the Japanese Yen as the counter currency. We will use the price of EUR/JPY at 123.000.
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). The pipette value would be the third decimal place. 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 EUR/123.00 JPY].
Or Simply
[(.01 JPY) / (129.00 JPY)] x 1 EUR = 0.0000813 EUR
When trading 10,000 units of EUR/JPY, each pip change in value is worth approximately 0.813 EUR.
Finding Pip Value in your Account Denomination
Now we need to know what the pip value of your position is in terms of your account currency. Forex 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 your account may be traded in.
This calculation is fairly simple; all you do is 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 EUR/JPY example above, we can convert the found pip value of .813 EUR to the pip value in USD by using EUR/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 EUR per pip / (1 EUR/1.5590 USD)
Or
[(.813 EUR) / (1 EUR)] x (1.5590 USD) = 1.2674 USD per pip move
Therefore, for every .01 or 1 pip move in EUR/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 0.7900 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.
You now know the math behind how pips are calculated and their values. However, this is more an academic study rather than something you need to commit to memory. Your broker will make all the necessary calculations instantaneously at the time of trade execution. This is all done by the power of highly sophisticated software so that you don’t need to break out the calculator before every trade.
If your broker doesn’t have a pip value calculator in case you want to know how much a pip is worth in a different currency, a simple search on Google or another search engine will provide you with many options.
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