The term PIP stands for ‘percentage in points’ or ‘price interest point’ and in simple terms is a unit of measurement which is used to express the change in price between two currencies. Pips are used in forex trading to calculate the spread (difference between the Bid and Ask price) of a currency pair, and to express any profit or loss made on a trade. To learn more about spread, please click here.
When FX prices were quoted with 4 decimals, the pip used to be the smallest change in the price. For more accurate pricing, 5 decimals have now been introduced for some instruments, however, this has not changed the pips positioning with regards to its decimal placement.
How to read a pip:
For prices quoted with 2 and 4 decimals – the pip is the smallest change in the last decimal.
- Example 1: The difference between 1.00 to 1.01 is 1 pip.
- Example 2: The difference between 1.0000 to 1.0001 is 1 pip.
For prices quoted with 3 and 5 decimals, the smallest change in the market price is called a point or pipette;
where 1 pip = 10 points.
- Example 3: The difference between 1.000 to 1.001 is 1 point or 0.1 pips.
- Example 4: The difference between 1.00000 to 1.00001 is 1 point or 0.1 pips.
Now, why is the pip important? Well, the pip actually has a monetary equivalent.
How to calculate the pip value?
To calculate the pip value for FX pairs, you can see the following examples:
- To work out the Pip value in the quote currency for non-JPY pairs the formula is:
- Contract size* lot size* pip (expressed as a decimal) = the pip value in quote currency of the pair
- Here is an example, if I want to trade 1 lot on EURUSD: my contract size is 100,000* my lot size is 1*a pip expressed as a decimal 0.0001 = 10 USD
- To work out the Pip value in quote currency of JPY pairs the formula is:
- Contract size* lot size* pip = the pip value in quote currency of the pair
- Here is an example, if I want to trade 1 lot on USDJPY: my contract size is 100,000* my lot size is 1 * a pip expressed as a decimal 0.01 = 1,000 JPY
Keep in mind; If the quote currency of the FX pair you are trading is not the same as your account currency, you will then need convert the pip value in the quote currency to the base currency of your account. Although this conversion is done automatically within the trading platform, you can also access our currency converter by clicking here to check this prior to opening a trade.
To help manage risk more effectively, it is important to know the value of the pip in the currency of your account. Whilst it is useful to be able to calculate the pip value manually, here at TradersTrust we offer a variety of trading tools including a pip calculator that can be accessed here
For more information about Forex trading and the terminology used, please visit our educational blog and learning materials or open Demo account and trade risk free here