As an aspiring forex trader, you’ll have to navigate many terminologies. Some of them may be confusing at first, but understanding them is vital to your long-term trading success. A pip is one of such terms, so what does it mean?
A pip stands for Percentage in Point or Point in Percentage. Also known as Price Interest Point, it’s the smallest change in value between a pair of currencies, represented by a single digit. The pip move is represented by the digit in the fourth decimal place in a standard forex quote.
The rest of this article will cover all you need to know about a pip and how it’s represented in different trading pairs. You’ll also learn how to find a pip’s value per trade.
Pips in Forex Trading Explained
Forex traders make or lose money when the price of a tradable asset moves up or down. A pip gives a pictorial presentation of these moves.
For example, if the price of GBP/USD moves up from 1.3590 to 1.3591, it has moved by one pip to a forex trader. Similarly, a downward move down from 1.3590 to 1.3589 is a one pip move in forex.
The representation carries on to tradable assets with two digits after the decimal point, such as the Japanese Yen pairs. So, for a Japanese Yen pair like GBP/JPY, a broker will quote the price at 151.17. The second digit here denotes the pip movement, which means that a move from 151.17 to 151.18 will denote a one-pip movement.
The representation still holds even with so-called five-digit forex brokers. With such a broker, the GBP/USD quoted above will be represented as 1.35902, while the GBP/JPY’s quote may be displayed as 151.174.
The fifth or third digit for both pairs is known as a pipette.
Pipette in Forex Trading Explained
A pipette is a fractional pip, and one pipette is a tenth of a pip in forex trading. Five-digit brokers add pipettes to their quotes for better pricing and spread management.
With pipettes added, standard four-decimal pairs become five decimal pairs, while the two-decimal pairs become three. Most experienced Forex traders ignore pipettes when analyzing an asset’s price because they are insignificant overall.
Here’s how a pipette is represented on the popular Metatrader platform:
As you can see above, the pipette for the price quote is denoted by smaller numbers after the four main decimal points.
The image below from Babypips.com paints a clearer picture of how to read pips in forex trading.
Calculating Pip Value
To find a pip’s value, you should multiply one pip by the lot size for the position. For a standard lot (1.0), you’re trading 100,000 units of the base currency, while for a mini lot, you’re trading 10,000 units.
So, to find the value of one pip when trading one standard lot on the GBP/USD pair, you should calculate as follows:
0.0001 x 100,000= $10.
With the calculation above, you’ll earn $100 if the price of GBP/USD moves up by ten pips and lose the same dollar sum if the market goes against you.
By the same logic, you’ll make or lose $10 for every ten pips if you’re trading a mini lot (10,000 units).
Knowing the value of each pip makes it easier for traders to calculate profit targets and stop-loss levels in monetary terms. Instead of calculating market movement in pips, traders can work out how the monetary value of their trading account will fluctuate as the market moves up or down.
You should keep in mind that the value of one pip will differ for various tradable pairs. A common rule of the thumb is that one pip is $10 for one standard lot on all pairs with USD as the counter currency (EUR/USD, GBP/USD, AUD/USD, etc.).
For every other pair, the value of one pip is displayed in the counter currency (JPY for GBP/JPY), for example.
Do You Have To Calculate Pips in Trading?
You don’t have to calculate pips in trading. Most forex brokers have highly sophisticated platforms that won’t require you to pull out your calculator each time you need to open a trade.
The knowledge contained here only provides you with insight into how the calculations are done and nothing more. As a newbie, you’ll probably have to learn how to choose the right lot size for your account balance first.
Once you have that covered, you can relax and watch the platform do the rest of the work.
Why You Need To Understand Pips and Pipettes in Trading
You need to understand pips and pipettes in trading for two main reasons.
First, price movement is the core of forex trading, and the only way to interpret the magnitude of each move is to know how many pips the asset has moved within the timeframe under review.
New traders who don’t understand how pips work mistake one-pip moves for ten-pip moves, ten-pip moves for 100-pip moves, and more.
Secondly, understanding pips and pipettes make money management easier. You’ll know exactly how many pips a pair has to move for you to make or lose X amount and set your automatic take profit or stop-loss orders around the corresponding prices.
How Are Profits Calculated for Accounts Denominated in a Different Currency?
Profits are calculated for accounts denominated in a different currency by dividing the lot value by the current exchange rate for the counter currency and the account denomination currency.
So, if you own a GBP denominated account and close a mini-lot GBP/USD trade after making a ten pip profit, you would have to convert the $10 lot value into pounds. You can get the total sum by dividing the $10 by the current exchange rate for GBP/USD.
Assuming it is 1.3590, your account balance will increase by £7.16.
Understanding what a pip entails in trading is an important part of your trading foundation. You don’t need to run the various calculations above manually as a trader. However, knowing how to calculate it and interpret the price on a chart at a glance will help you react faster when trading. It will also give you a better handle on your risk management overall.
- Oanda: What is a Pip in Trading?
- Sharp Trader: How to Calculate Forex Price Moves
- Baby Pips: What is a Pip in Forex?