What is a Forex pip? Forex trading for beginners
If you’ve done even the slightest bit of research into the Forex (FX) market than you’ve probably heard of the terms “pips,” “points”, “pipettes,” and “lots” thrown around a lot. If you are new to trading currencies this may all seem extremely confusing and alien-like terms.
We put this guide together to explain what pips are and show you how pip values are calculated. By the end of this guide, you will have a solid understanding of what a Forex pip means.
Note: Please 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.
Here is where we’re going to do a little math. Don’t worry it won’t get too complex.
What is a pip?
A “Pip”, short for point in percentage, is the unit of measurement used to express the change in value between two currencies forex market.
When we make a trade, we normally target a predetermined number of pips for our entry points and stop losses. A pip (percentage in point) is the unit of measurement that we use to express the change in value between the currencies in our currency pair.
To be exact, a pip is a standardised unit and is the smallest amount that any currency pair quote can change. Because of this, a pip is usually the last decimal place in a currency pair.
A pip is a standardised unit and is the smallest amount by which a currency quote can change. It is usually $0.0001 for U.S.-dollar related currency pairs, which is more commonly referred to as 1/ 100th of 1%, or one basis point. This standardized size helps to protect investors from huge losses. For example, if a pip was 10 basis points, a one-pip change would cause greater volatility in currency values.
As a rule of thumb, most of the currency pairs in the forex market are quoted to four decimal places. In this instance, the fourth decimal place is the pip, as shown below.
What Does Pip Stand For?
Some say that the term “pip” originally stemmed from Percentage-In-Point, others claim it stands for Price Interest Point. Whatever the origin of the term, pips allow currency traders to discuss small changes in exchange rates in readily understandable terms.
The value of a pip varies based on the currency pairs that you are trading and depends on which currency is the base and which is the quote currency.
Most currency pairs go down to 4 decimal places, but there are some exceptions like Japanese yen (JPY) pairs, which go down to two decimal places). For example, 1 Pip for EUR/USD is 0.0001, and for USD/JPY, it is 0.01. As shown below:
Calculating the value of a pip
Let’s take a look at some examples of market movements in terms of their pip value.
Example: one pip move
If the value of the GBP rises against the dollar by one pip then we would see a move like this.
In this example, the value of GBP has risen by 1 pip against USD. If we were longing on this move, we would have made a 1 pip profit.
Example: 100 pip move
If the value of the GBP rises against the dollar by 100 pips then we would see a movie like this.
Why are pips different between currency pairs?
The value of one pip is always different between currency pairs because of differences between the exchange rates of various currencies. A phenomenon does occur when the U.S. dollar is quoted as the quote currency. When this is the case, for a notional amount of 100,000 currency units, the value of the pip is always equal to US$10.
Now I know what a pip is, 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 “pipettes.”
If you found the concept of a Pip a confusing concept, we are about to make you even more confused and point out that a “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.
Average pip movement in the market
On average, forex markets usually move anywhere between 80-100 pips per day. Of course, this differs between each market but that is a reasonable average to draw from.
Now, this may not seem like much, and on the grand scheme of things it isn’t, but when we include the use of leverage and margin trading, we can profit quite significantly from these kinds of moves in the market. More on that later in this unit.
You should now have the answer to the question of ‘what a pip is in trading’. Being conversant with the unit of measurement for changes in FX rates is an essential first step on the path to becoming a proficient trader. If you enjoyed this discussion of FX pips in investing, why not take a look at our article on the best currency pairs to trade in Forex?
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