What Are Pips in Forex?
You’ve probably heard the term pips being thrown around.
Did you just smile and nod?
Today, you’re going to learn what they are and how their values are calculated. No matter what forex trading strategy you are going to use, the first thing you need to know is how to calculate the value of a decimal point in a currency pair.
Take your time with this information, read this as many times as you need, do your market research if needed, scream at your monitor as much as you need but make sure you understand it before moving on to the next lesson.
What the Beep is a Pip?
Just like a pip is the smallest part of a fruit, a pip in the Forex market refers to the smallest price unit related to a currency pair. Pip is an abbreviation for point in percentage or price interest point and is the unit of measurement used to express the change in value in a particular currency pair.
Professional Forex traders express their gains and losses in the number of pips their position rises or falls.
For example, if the GBP/USD moves from 1.2713 to 1.2714, that 0.0001 pip change rise in the exchange rate is 1 pip.
Fun fact: All major currency pairs go to the fourth decimal place to quantify a pip apart from the Japanese Yen which only goes to two.
Calculating the Value of a Pip.
So now that we know what a pip is, what does it mean to us in terms of how much profit we make or how much money we can lose for each price movement?
This depends on the size of the position we open in the Foreign Exchange market. Larger positions mean each pip movement in the pair will have a greater monetary consequence to our balance. On this note, you should take into account the fact that forex brokers offer leveraged trading, meaning you need to calculate the pip value of currency pairs including the leverage provided by your brokerage firm.
To calculate this is quite simple. Let’s take an example and stick with our two currencies – the GBP versus USD.
Example: One Pip Move.
Say we wanted to open a position size of 10,000 units. Our calculation to establish what a one pip movement means to us is as follows:
10,000 (units) x 0.0001 (one pip) = $ 1 per pip.
So a position of 10,000 means that every time the pair moves 0.0001 (or 1 pip), we make a profit or loss of $1.00 depending on which way it moves, meaning the pips value is $1. If the position moves 100 pips, we will make a profit or loss of $100.
How Much Are Pips Worth and How Do They Work in (Most) Currency Pairs?
We can do this for currency trades of any size. The calculation is simply the trade size x 0.0001 (1 pip).
5,000 (units) x 0.0001 (1 pip) = $ 0.50 per pip.
50,000 (units) x 0.0001 (1 pip) = $ 5 per pip.
125,000 (units) x 0.0001 (1 pip) = $ 12.50 per pip.
The pip value in any currency pair’s exchange rate is always measured in the currency of the quoted currency of the pair , e.g. the quote currency on the right-hand side of the pair.
So in the example of the GBP/USD, we see our pip value is always in US Dollars (which is the counter currency).
If we were trading the USD/GBP pair, the pip value would be in Pound Sterling (GBP being the counter currency and USD being the base currency).
10,000 units x 0.0001 (1 pip) = £ 1.00 per pip.
50,000 units x 0.0001 (1 pip) = £ 5.00 per pip.
125,000 units x 0.0001 (1 pip) = £ 12.50 per pip.
Example: 10 Pip Move.
If the value of the GBP rises against the dollar by 10 pips then we would see a move like this.
10,000 units x 0.0010 (10 pip) = £ 10.00 per pip.
50,000 units x 0.0010 (10 pip) = £ 50.00 per pip.
125,000 units x 0.0010 (10 pip) = £ 125.00 per pip.
Example: 100 Pip Move.
If the value of the GBP rises against the dollar by 100 pips then we would see a move like this.
10,000 units x 0.0100 (100 pip) = £ 100.00 per 100 pips.
50,000 units x 0.0100 (100 pip) = £ 500.00 per 100 pips.
125,000 units x 0.0100 (100 pip) = £ 1,250.00 per 100 pips.
Forex Trading and Pip Movements of a Currency Pair.
And that’s all there is to pips!
Even though you’re now a pip legend, I know exactly what you’re thinking….
Do I really need to calculate all this every time I make a trade?
Hell to the now!
I know I said to read this and scream at your monitors until you understand it, but I think now’s the right time to admit that there is an easier way…
Nearly all Forex brokers will work all this out for you automatically on their trading platforms when you trade forex (…and hey now you know how they calculate it!). Or you can always use our Pip Value Calculator to know what the pip values are and analyze price movements in currency trading.
You can thank me later.
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