What Is a Pip in Forex Trading?
Why Most Price Changes
Are Quoted in Pips
What does a pip actually mean in Forex trading?
In simplest terms, a pip is the smallest movement an exchange rate can make. When referring to an FX pair changing in price, either by going up or going down, traders will say, the following pair moved x amount of pips.
How Can You Identify the Pip?
Identifying a pip is fairly straightforward. When you are dealing with FX pairs, you will normally see five numbers after the decimal point. For example, EURUSD is currently priced at 1.07832. The PIP here will be the fourth number after the decimal point. In this case it is the “3”.
What Does a 1 Pip Move Look Like?
In our previous example, if the EURUSD price goes up 1 pip, the price will go from 1.07832 to 1.07842. This is considered as a 1 pip move. On a day to day basis you can see the price go up or down anywhere from 20 pips to 100 pips on a fast moving day.
What does a 23 pip move look like? Again, using our previous example, EURUSD will go from 1.07832 to 1.08062.
What does a 149 pip move look like? Again, using our previous example, EURUSD will go from 1.07832 to 1.09322.
Exceptions
In general, you will realize not all pairs have 5 decimal points. Some will have 4 and some will have 3. An unwritten rule with MT4 is that the PIP is always the second number from the right of the overall quote.
Examples:
USDMXN 18.7867 - The 6 is considered as the pip.
USDJPY 112.049 - The 4 is considered as the pip.
What Is the Value of a Pip?
The value of each pip will depend on the size of your position. To make it simpler, you can think of the pip value being 10 units of the quote currency for every 100,000 units (standard lot) of currency you are trading.
Let's look at an example. If you trade 1.0 lots (100,000 units) of EURUSD, every time the price moves 0.00010 or 1 pip, the value will be equivalent to 10 USD. The pip value is always calculated in the quote currency which is always the second currency on the pair ex EURUSD.
Being able to calculate the value of a single pip makes it easier for traders to put a dollar value on how much they are wanting to profit or willing to lose per trade. This is a very important part of risk management that all traders must master.
It is also important to keep in mind that the value of the pip will change as you trade different forex pairs. As mentioned above, the value of the pip is measured by the quote term. Therefore if you are trading USDCHF, the pip value will be in Swiss Francs. If you are trading 1.0 lot of USDCHF, we already know your pip value will be 10 CHF, it is now up to you to convert this 10 CHF to your trading account currency. If your trading account is in USD, simply exchange the 10 CHF to USD. You do this by dividing 10 into the exchange rate. Let’s say the USDCHF rate is 0.97580. The calculation would be 10 / 0.97580 = 10.24 USD. This will be the pip value.
Here is a breakdown of the calculation for trading 1.0 lot of EURUSD:
Pip Value = Contract Size x One Pip
Pip Value = 100,000 x 0.00010
Pip Value = 10 USD
For more information on what a pip is or how to calculate pip value please feel free to reach out to us. We would be more than happy to discuss with you. Also we encourage you to download our Forex Beginners User Guide.
