What are pips in forex trading?

You’ve probably heard the terms ‘pips’, ‘points’, ‘pipettes ‘ and ‘lots ‘ thrown around. What are pips in forex trading? We will explain what they are and show you how their values are calculated. Take your time with this information, as knowledge is required for all currency traders. Don’t even think about trading until you are comfortable with pip values and how to calculate profit and loss.

What is that beep?

The unit of measure for expressing the change in value between two currencies is called a ‘pip’. If the EUR/USD currency pair moves from 1.1050 to 1.1051, the .0001 USD value increase is a pip. A pip is usually the last decimal place in a price.

Most currency pairs are priced to four decimal places, but there are some exceptions such as Japanese yen pairs (they have two decimal places). For example, for EUR/USD a pip is 0.0001 and for the USD/JPY currency pair it is 0.01.

What is a pipette?

There are forex brokers who quote prices in currency pairs beyond the standard “4 and 2” decimals to “5 and 3” decimals. They offer so-called fractional pips, also known as ‘points’ or ‘pipettes’.

If the concept of “pip” is not already confusing enough for the new currency trader, let us try to confuse you even more and point out that a “point” or “pipette” or “fractional pip” is equal to a “tenth of a pip”.

For example, if the GBP/USD currency pair moves from 1.30542 to 1.30543, it is .00001 USD higher than a pipette. This is what fractions look like on a trading platform:

On trading platforms, the number representing one tenth of a pip is usually displayed to the right of the two larger numbers.

How to calculate the value of a beep

As each currency has its own relative value, it is necessary to calculate the value of a pip for the current currency pair. In the following example, we use a quotient with four decimal places.

To better explain the calculations, exchange rates will be expressed as a ratio, i.e. the EUR/USD currency pair at 1.2500 will be written as “1 EUR/1.2500 USD”.

Example 1: USD/CAD = 1.0200

Read as 1 USD to 1.0200 CAD or 1 USD/1.0200 CAD).

(The change in value of the counter currency) times the exchange ratio = pip value (in terms of the base currency).

[.0001 CAD] x [1 USD / 1.0200 CAD]

Or simply as:

[(.0001 CAD) / (1.0200 CAD)] x 1 USD = 0.00009804 USD per unit traded.

Using this example, if we were trading 10,000 records of the USD/CAD currency pair, a one pip change to the exchange rate would be approximately a $0.98 change in the position value (10,000 units x $0.00009804/unit).

We say “approximately” because when the exchange rate changes, the value of each pip moves.

Example 2: GBP / JPY = 123.00

Here is another example using a currency pair with the Japanese yen as the counter currency. Note that this currency pair only goes to two decimal places to measure a 1 pip change in value (most of the other currencies have four decimal places). In this case, a change of one pip would be 0.01 JPY.

(The change in value of the counter currency) times the exchange ratio = pip value (in terms of the base currency).

[.01 JPY] x [1 GBP / 123,00 JPY]

Or simply as:

[(0.01 JPY) / (123.00 JPY)] x 1 GBP = 0.0000813 GBP

So when you trade 10,000 units of the GBP/JPY currency pair, each change in value is worth around GBP 0.813.

How to find the pip value in your currency account

The last question to ask when calculating the pip value of your position is: “What is the pip value in terms of the currency of my trading account?”.

After all, it is a global market and not everyone has their account in the same currency. This means that the pip value must be translated into whatever currency our account can be traded in.

This calculation is probably the simplest of all; just multiply/divide the ‘found pip value’ by the exchange rate of your account currency and the currency in question.

If the currency “found pip value” is the same currency as the base currency in the exchange rate quote:

Using the GBP/JPY example above, let’s convert the found pip value of .813 GBP to the pip value in USD by using GBP/USD at 1.5590 as our exchange rate ratio.

If the currency you are converting to is the counter currency for the exchange rate, all you have to do is divide the “found pip value” by the corresponding exchange rate ratio:

.813 GBP per pip / (1 GBP / 1.5590 USD)

Or

[(.813 GBP) / (1 GBP)] x (1.5590 USD) = 1.2674 USD per movement

So for every .01 pip movement in GBP/JPY, the value of a 10,000 unit position changes by about $1.27.

If the currency you are converting to is the base currency of the exchange rate ratio, then multiply the “found pip value” by the exchange rate ratio.

Using our USD/CAD example above, we want to find the pip value of USD 0.98 in New Zealand. We use .7900 as our exchange rate ratio:

0.98 USD per pip X (1 NZD / .7900 USD)

Or

[(0.98 USD) / (.7900 USD)] x (1 NZD) = 1.2405 NZD per pip movement

For every .0001 pip movement in USD/CAD from the example above, your 10,000 unit position changes in value by approximately NZD 1.24.

Even if you are now a math genius – at least with pip values – you probably roll your eyes and think: “Do I really need to figure all this out?”

The answer is a big NO. Almost all forex brokers will arrange all this for you automatically, but it’s always good for you to know how they work.

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