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,” “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.
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 on earth 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. 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.
Calculating the value of a pip
If EUR/USD moves from 1.1050 to 1.1051, the .0001 USD rise in value is equal to 1 PIP.
A pip is usually the last decimal place of a price quote
The value of a pip varies based on the currency pairs that you are trading and depends on which currency is the base currency and which is the counter 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.
Using this EUR/ USD example:
- You buy 10,000 euros against the U.S. dollar (EUR/USD) at 1.10550 and you earn $1 for every pip increase in your favor. If you sold at 1.10650 (a 10-pip increase), you would make $10.
- If the above circumstances were the same except that you sold at 1.10450 (a ten-pip decrease), you would lose $10.
Let’s look at a USD/JPY example, with the U.S. dollar being the base currency?
In this case, the value of one pip depends on the USD/JPY exchange rate.
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.