What is a Pip in Forex

What is a Pip in Forex

What is a Pip  in Forex?:  A pip “Percentage In Point” in Forex is the unit of measurement represents the smallest change in value between the two currencies. It is very easy to understand what is a pip in forex trading, most major currency pairs are 5 digits after the decimal point, and the pip value is the 4th decimal place, except the Japanese Yen pairs such as USD/JPY, EUR/JPY, GBP/JPY, AUD/JPY and so on. The reference has only 3 decimal places, where a pip is the second decimal place. For example, for EUR / USD, 1 pip is equivalent to 0.0001, and for the USD/JPY pair, it is 0.01. The number of points is usually the last decimal place of the quote for any currency pair.

Some Examples for Major Currency pairs except Japanese pairs

If the EUR/USD moves from 1.1150 to 1.1151, that`s 0.0001 USD rise in value is 1 Pip.
If the GBP/USD moves from 1.2450 to 1.2455, that`s 0.0005 USD rise in value is 5 Pips.
If the USD/CAD moves from 1.3175 to 1.3180, that`s 0.0010 USD rise in value is 10 Pips.

Some Examples for Major Currency pairs except Japanese pairs

If the USD/JPY moves from 110.50 to 110.51, that`s 0.0001 USD rise in value is 1 Pip.
If the EUR/JPY moves from 121.00 to 121.05, that`s 0.0005 USD rise in value is 5 Pips.
If the GBP/JPY moves from 135.10 to 135.20, that`s 0.0010 USD rise in value is 10 Pips.

 

The effect of different lot sizes on the value of a single pip is shown in the table below.

 

How to Calculate Pips?

First, we should know that the amount of money we can gain or lose with a change of one pip in a currency pair depends on our trade size. The standard lot is 100,000 units, the mini lot is 10,000 units, micro lot is 1,000 units, and nano lot is 100 units. When we trade currency pairs like EUR/USD the value of a pip is $10 for a lot of 100,000 units. To buy 100,000 euros, we need to pay $112,500 USD, at the current currency rate of 1.1250. If it changes to 1.1251, we will gain $10.

This can be calculated very easily for currency pairs (except the Japanese Yen pairs):
The trade size x 0.0001 = Monetary value of a pip

And for Japanese Yen pairs :
The trade size x 0.01 = Monetary value of a pip

Here is an example of EUR/USD:

When we open a position size of 100,000 units (1 Standard Lot) and calculate the pip value as follows:
100,000 (units) x 0.0001 = $10 per pip.
When we open a position size of 100,00 units (1 mini Lot) and calculate the pip value as follows:
10,000 (units) x 0.0001 = $1 per pip.
When we open a position size of 1,000 units (1 micro Lot) and calculate the pip value as follows:
1,000 (units) x 0.0001 = $0.10 per pip.

Here are a few more examples of trades.

Trade 1 – EUR/USD
Entry at 1.1150
Exit at 1.1175
Profit/Loss = ±25 pips

Trade 2 – GBP/USD
Entry at 1.2350
Exit at 1.2400
Profit/Loss = ±50 pips

Trade 3 – USD/CHF
Long entry at 0.9950
Exit at 1.0025
Profit/Loss = ±75 pips

Trade 4 – USD/CAD
Entry at 1.3175
Exit at 1.3280
Profit/Loss = ±105 pips

Trade 5 – ESD/JPY
Entry at 109.75
Exit at 109.95
Profit/loss = ±20 pips

Trade 6 – EUR/JPY
Entry at 120.80
Exit at 122.10
Profit/loss = ±130 pips

Trade 7 – GBP/JPY
Entry at 135.50
Exit at 136.30
Profit/loss = ±80 pips

We can notice what is a pip in forex from the above examples that pip is four digits after the decimal point or second after the decimal point. On a EUR/USD currency pair, the pip is the fourth decimal, and on the USD/JPY currency pair, the pip is the second decimal.

What is a Pipette?

A pipette represents the smallest change in value and it is a fraction of a pip. Pipette has a value of 1/10 of a pip. The Pipette is the fifth decimal place in an exchange rate of the currency pairs except the Japanese Yen pairs. In Japanese yen pairs the third decimal place in an exchange rate. For example, for EUR/USD pair 1 Pipette is equivalent to 0.00001, and for the USD/JPY pair it is 0.01. A Pipette is usually the last decimal place of a price quote of any currency pairs.

Most of the time we use pips, but it can be very helpful to know the spread of the currency pairs. The pipettes are very useful for brokers to maintain their spreads. Many brokers quote their spreads using pipettes with five or two decimal places. For example, the spread of the EUR/USD pair can be 0.5 pips or 5 pipettes, and the UER/CAD can have a spread of 1.5 pips or 1 pips and 5 pipettes.

The value of the Pip & pipette will be different depending on the size of the lots that the trader had opened. For example, in a trader has opened a lot of EUR/USD then every one “pip” move is $10 and a “pepettle” will be $1. If a trader buys a mini lot (0.1 lot) then one pip move will be $1 and a pipette will be $0.10.

Summary

We have learn what is a pip in forex trading with many examples. A pip is forex trading is a very small price movement. The pip “Percentage In Point” is very useful to measure the movement of the currency pair. Traders use pips to measure the price movements to compare transactions in any currency pair to understand profit or loss.. The pip in forex also allows the trader to calculate the most appropriate position size for the trade, which can also help us to evaluate the risk of the currency pair.