Seeing the term “Pip” in FOREX trading is pretty common since it is a frequently used and essential term in the FOREX market. It is recommended not to trade until you know what does a pip means, what do it does and its value. That is because pips will, essentially, tell you how much you will be earning or losing in each trade.
A pip is known as a unit of measurement to express the change in value between two currencies. “PIP” stands for Point In Percentage. In FOREX trading, a pip is used as a “point” for calculating profits and losses.
For instance, if GBP/USD moves, from 1.3054 to 1.3055, that .0001 USD rise in value is ONE PIP.
Usually, a pip is shown as the last decimal place of quotation. With some exceptions like Japanese Yen pairs, which go out to two decimal places; most pairs go out to four decimal places
Most electronic platforms add additional transparency as each currency pair is quoted with precision to 1/10th of a pip. This allows price providers to carry spreads down even further as they are not limited to quoting in full pip increases. This benefits the trader because the spread is a crucial component of your transaction cost.
What is a Pipette?
There are many brokers that quote currency pairs beyond the standard “four and two” decimal places to “five and three” decimal places. Which are known as «Pipettes«, also associated by the term of “fractional pips”.
For example, if EUR/USD moves from 1.10501 to 1.30502, that .00001 USD movement is one pipette
Difference between currency pairs.
Currency trading, in FOREX Markets, is conducted most frequently among the U.S. Dollar, the British pound, the Euro, the Japanese Yen and the Canadian Dollar.
Each currency pair represents the relationship between both currencies, for example, the USD/CAD describes the relationship between the U.S. Dollar and the Canadian Dollar. The first currency represents the base currency and the second currency as the quote currency.
For example, you’ll need to pay $112,000 for 100,000 Euros if you want to buy EUR/USD at 1.1200 on a trade for 100,000 currency units, the cost can be calculated by multiplying 100,000 * 1.12.
Actual value per pip.
As each currency has its relative value, it will be necessary to calculate the cost of a pip for that specific currency pair, but it is not hard, determining the value of a pip can be done by hand, through a mathematical method.
Start with the size of your trade. If you go with the value of a pip for a mini lot, then, start with 10,000. Next, multiply the trade size by one pip for the pair that you are trading.
For example, if you want to trade 10,000 units of USD/CAD, then a one pip change to the exchange rate would be approximately a 0.98 USD change in the position value (10,000 units x 0.0000984 UST/unit).
If your trading account is based in US Dollars, you will see USD 0.98 of profit or loss on your account for every one pip move that the USD/CAD makes in the market.
If your trading account is based in other currency, then you’ll have to convert that USD 0.98 into the particular currency that your trading account is based on.
For example, if your trading account is based in Euros (EUR), you would need to convert that USD 0.98 into Euros.
Well, it is as simple as a mathematical problem. Divide by the current EUR/USD exchange rate, which, at the time of this article’s writing, finds itself at 1.2298. You have to divide because an Euro is worth more than a USD. So, the result should be less than 1. 0.98, which, divided by 1.2298, equals to 0.7968 Euros.
With that said, if you have a Euro-based account, and earn or lose one pip on 1 10,000 lot of USD/CAD, you would earn or lose 0,7968 Euros.
As for two decimal pairs, like Japanese Yen, one pip move would be .01 JPY. So trading 10,000 units of GBP/JPY, for example, would have each pip’s change in value worth approximately 0.813 GBP.
How does leverage affect pip value.
Leverage is known as the amount of money you can spend, and this comes from the result of borrowing investment capital. In theory, more leverage means a more significant risk; the decrease of a few pips could mean losing all of the money in your account.
As you increase your leverage, you will also increase the volatility of your position; a small change in pip value will result in more substantial fluctuations in your account value.