When investing in Forex, you’ll likely come across the abbreviations ‘BPS’ and ‘pip’ in your research or while communicating with other traders. The word ‘pip’ is short for ‘percentage in point,’ which is a unit of change in price on the Forex market. But how is that different from the basis point, or BPS?
A pip and BPS are the same things, with the former being one basis point or 0.001% of 1%. The smallest move the USD/CAD currency pair can make is $0.0001, or one basis point. This quantity is also known as BPS. A basis point (BPS) is a common term for interest rates and their financial percentages.
In this article, we’ll discuss the similarities and differences between a pip and BPS and how each is calculated.
How Are Pips and BPS Similar?
Pips and BPS are essentially the same, measuring the change in price for a given currency.
Most currency pairs move by increments of 1/100th of one percent or by one pip. Knowing what a pip is and how to calculate it is essential to successful Forex trading.
When investing, you should know the difference between the two terms. For example, to calculate your profit or loss on a trade, you need to know how much your instrument has moved and how much your position size is worth in pips.
Pips and BPS are similar because they’re both used to measure the change in price for a given currency. In most cases, currency pairs move by increments of 1/100th of one percent or by one pip.
Pip and BPS Calculation
Pip and BPS are two different ways of measuring the same thing – the change in a currency’s value. BPS is the standard measure, while pip is used mainly in the Forex market. Both are calculated by dividing the position size by the exchange rate or by the notional value of a trade.
The main difference between pip and BPS is that pip measures move in absolute terms (based on cents), while BPS measures them in percentage terms. This means that a larger movement in BPS will result in a smaller profit or less than an equivalent pip movement.
BPS is calculated in the same way as pip value, but with the exception that it’s used to measure movements in percentage terms. To calculate BPS, divide the size of your position by the notional value of your trade.
Since currencies typically move by increments of 1/100th of one percent or a pip, this can be cumbersome when discussing rates that don’t follow this pattern exactly. Basis points alleviate some of that confusion by making it easier to compare gains and losses at different intervals of time.
In order to calculate your pip value, divide the size of your position by the exchange rate.
For example, if you buy EUR/USD at 1.3000 and sell it at 1.3010, your position size is 100,000 euros (1.3 million/1.3010).
To calculate your profit or loss in pips, subtract the selling price from the buying price. In this example, you would have gained ten pips (1.3010-1.3000).
The Difference Between Pips and BPS
When discussing bond yields or interest rates, most sources use basis points rather than pips to measure changes in price. A basis point represents 0.01%. So if you bought 10-year US government bonds with a yield of 0.15%, this would be equal to 15 basis points.
Investors who are unfamiliar with Forex may confuse a pip with a basis point. In practice, because changes in bonds and interest rates are measured in basis points, the term won’t be utilized in Forex trading.
The only real difference between pips and BPS is that pips are typically used when discussing Forex rates, while BPS is more commonly used when discussing bond yields and interest rates. However, the two terms essentially mean the same thing and can be used interchangeably when speaking generally.
When trading currencies, you’ll likely encounter the terms pip and BPS. Pip is short for “percentage in point,” while BPS stands for “base point spread.” Both are used to measure a currency’s price movement.
Which measurement you use depends on what you find more convenient, but it’s important to be aware of both so that you can effectively compare rates and calculate your profits and losses.
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- Investopedia: Comparing Pips, Points, and Ticks
- Investopedia: Basis Points (BPS) Definition
- ZFX: What Is Spread and Pip? The Difference Between Basis Point and Pip