In this article, I will explain to you, what is a pip in forex?:
- how to calculate a pip
- how to calculate the value of a pip
None starts forex trading until they know what a pip is.
Why Are Pips Important In Forex Trading?
For me, pips are important because it allows me to calculate my profit and loses.
In addition to that above, with pips, you can:
- calculate your take profit targets,
- calculate where to place your stop loss,
- calculate where to place your orders (for example, place a pending buy stop order 2 pips above the high of a forex reversal candlestick pattern)
So What Is A Pip?
“PIP” is short for Point In Percentage. Is is a unit of measurement.
What does pip measure?
It measure the unit of change between currency pairs.
For example: If EUR/USD moves from 1.1040 to 1.1041, that difference of .0001 USD rise in value is ONE PIP
When forex brokers quote currency pairs, the standard quotes come in are in either 2 or 4 decimal places.
In the case above, a pip is in the 1/10,000th place or 4 places to the right of the decimal. Most currency pairs are quoted to the 4th decimal place.
Any currency pair that involves the Japanese Yen (JPY), a pips is the 1/100th place: 2 decimal places to the right.
In all other currency pairs, a pips is 1/10,000 or 4 decimal places to the right.
Ok, how many pips move if EURUSD goes from 1:1041 to 1:1089?
Answer: 41 pips (get the difference :1.1089-1.1041=41)
Base Currency And Counter Currency
In order to calculate the value of a pip, you need also to know what a based and counter currency is.
The based currency is the the first currency in front of a quote.
The counter currency is the second currency in the quote.
If GBPUSD is 1:5143 then the base currency is GBP and counter currency is USD.
This means that 1 GBPUSD can be exchanged for 1.5143 USD.
How To Calculate The Value Of A Pip?
The monetary value of each pip depends on three factors:
- the currency pair being traded,
- the size of the trade,
- and the exchange rate.
The example below shows how to calculate the value of 1 Pip for one 100K lot of EUR/USD where the base currency of the account is USD:
- Start with 100,000. Multiply 100,000 by .0001 since 1/10,000th is a pip for all pairs (except JPY pairs). 100,000* .0001 = 10.
- You now know each pip is worth 10 USD. That will be valued in the “counter currency” (second currency) of the pair.
- In this example, we are using the EUR/USD, so USD is the counter currency of the pair. Here, 1 pip is worth 10 USD dollar for 1 – 100k lot of EUR/USD.
Here’s another example using a currency pair with the Japanese Yen as the counter currency.
Notice that 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). 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 GBP/123.00 JPY]
Or simply as:
[(.01 JPY) / (123.00 JPY)] x 1 GBP = 0.0000813 GBP
So, when trading 10,000 units of GBP/JPY, each pip change in value is worth approximately 0.813 GBP.
Finding the Pip Value in your Account Denomination
Now, the final question to ask when figuring out the pip value of your position is, “what is the pip value in terms of my account currency?”
After all, it 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 our account may be traded in.
This calculation is probably the easiest of all; simply 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 GBP/JPY example above, let’s convert the found pip value of .813 GBP to the pip value in USD by using GBP/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 GBP per pip / (1 GBP/1.5590 USD)
[(.813 GBP) / (1 GBP)] x (1.5590 USD) = 1.2674 USD per pip move
So, for every .01 pip move in GBP/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 .7900 as our conversion exchange rate ratio:
0.98 USD per pip X (1 NZD/.7900 USD)
[(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.
Even though you’re now a math genius–at least with pip values–you’re probably rolling your eyes back and thinking, “Do I really need to work all this out?”
Well, the answer is a big fat NO. Nearly all forex brokers will work all this out for you automatically, but it’s always good for you to know how they work it out.