A pip is the unit of measurement to express the change in price between two currencies.
Just like a pip is the smallest part of a fruit, a pip in forex refers to the smallest price unit related to a currency. The term ‘pip’ is actually an acronym for ‘percentage in point’.
Professional forex traders often express their gains and losses in the number of pips their position rose or fell.
For example, if the EUR/USD moves from 1.2712 to 1.2713, that 0.0001 rise in the exchange rate is ONE PIP.
All major currency pairs go to the fourth decimal place to quantify a pip apart from the Japanese Yen which only goes to two.
Some brokers only quote to the fourth and second decimal place (for JPY pairs) but others, including AVA Trade, quote to the fifth decimal place of the currency to provide even greater accuracy when measuring gains and losses. This fifth decimal place is what we call a pipette – one tenth of a pip.
So for example if the EURUSD moves from 1.27128 to 1.27129, we can say it has moved one pipette or 0.1 pips (1 tenth of a pip).
So now that we know what a pip is, what does it mean to us in terms of how much money we make or lose for each movement?
Well this depends on the size of the position we opened. Larger positions mean each pip movement in the pair will have greater monetary consequence to our balance.
Let’s take an example and stick with our EURUSD pair. We can forget what price it is trading at for now and we’ll concentrate on how much money a pip move will be for various position sizes.
So 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) * 0.0001 (one pip) = $ 1 per pip
So a position of 10,000 (BUY or SELL) means that every time the pair moves 0.0001 (i.e. ONE PIP) then we will make a profit or loss of $1.00 depending on which way it moved.
Therefore, for a position of this size – 10,000 units – we will gain or lose $1 for every pip movement in either direction. So if the EUR/USD moves 100 pips (i.e. 1 cent) in our direction we will make $100 profit.
We can do this for any trade size. The calculation is simply the trade size times 0.0001 (1 pip).
5,000 (units) * 0.0001 (one pip) = $ 0.50 per pip
60,000 (units) * 0.0001 (one pip) = $ 6 per pip
123,000 (units) * 0.0001 (one pip) = $ 12.30 per pip
Our pip value WILL ALWAYS BE MEASURED IN THE CURRENCY OF THE QUOTE CURRENCY OF THE FX PAIR i.e. the currency on the right-hand size of the pair.
So in the example of the EURUSD we see our pip value is always in US Dollars.
If we were trading the EURGBP pair, the pip value will be in Pound Sterling.
10,000 units * 0.0001 = £ 1.00 per pip
Therefore the final calculation we must consider is if we have a trading account in a different currency denomination, as brokers offer accounts in US Dollar, Euro, Pound and Yen.
So let’s say we have a Euro platform taking our EURGBP example above and the current EURGBP exchange rate is 1.5000.
Then each pip movement of 1.00 would be automatically converted by our broker to – we simply divide 1$ by the current EURUSD rate which is 1.26500 which equals 0.79c.
If we are using a GBP platform one pip will equal 1$/1.59500 (the GBPUSD rate) or 0.63 pence.
These calculations will be done automatically on our trading platform but it is important to know how they are worked out.
At this point you may be asking ‘how can I trade such large positions such as 10,000 units of a currency pair? That sounds like a very large investment!’ The answer to that question is leverage which we will discuss in another article.