What is a Pips?
You’ve probably heard of the terms “pips,” “points“, “pipettes,” and “lots” thrown around, and now we’re going to explain what they are and show you how their values are calculated.
the PIP is the Price Interest Point. A pip is the unit of measurement for the change of value in the exchange rate of two currencies. For currency pairs with 4 decimals, 1 pip = 0.0001, while for JPY-quoted pairs, 1 pip = 0.01. Too complex? A couple of examples will make it clearer.
Let’s assume that EUR/USD is trading at 1.0799 meaning that with 1 EUR you can buy 1.0799 USD. If the rate changes to 1.0795, it means that there is a difference of 1.0799 – 1.0795 = 0.0004, which is 4 pips. If USD/JPY is quoted at 107.38, meaning that with 1 USD, you can buy 107.38 JPY, and then it changes to 107.40, it means a price change of 107.40 – 107.38 = 0.02, which is 2 pips.
A pip is usually the last decimal place of a price quote.
What is a Pipette?
There are forex brokers that quote currency pairs beyond the standard “4 and 2” decimal places to “5 and 3” decimal places.
They are quoting FRACTIONAL PIPS, also called “points” or “pipettes.”
If the concept of a “pip” isn’t already confusing enough for the new forex trader, let’s try to make you even more confused and point out that a “point” or “pipette” or “fractional pip” is equal to a “tenth of a pip“.
For instance, if GBP/USD moves from 1.30542 to 1.30543, that .00001 USD move higher is ONE PIPETTE.
When to Use Terms Pip and Pipette?
Pip is still the most used term in the daily Forex trading jargon. Usually, pip and pipette are used to:
- Express the spread — example: “the spread is 3 pips”, meaning that the difference between the ask and the bid price is 3 pips.
- Express a price change — “the price has dropped by 120 pips.”
- Express a gain or profit — “I made 40 pips with that trade.”
- Express a loss — “I lost 50 pips in EUR/USD.”
- Express the distance between the open price and the take-profit or stop-loss price — “A stop-loss of 30 pips and a take-profit of 60 pips”, meaning the stop-loss price will be 30 pips from the open price, and the take-profit 60 pips away.
How to Calculate Pip Value?
You would need to calculate a pip value when you want to understand the profit/loss of a trade and to implement risk management strategies.
A pip value is always calculated for a size or volume, usually a standard lot (100,000 units), a mini lot (10,000 units), or a micro lot (1,000 units). The first step to calculate a pip value is to multiply the volume for 0.0001 (0.01 in case of JPY pairs) — this will give you the value in the quote currency.
- Example 1: In a trade of 20,000 units of EUR/USD, you multiply 20,000 × 0.0001 = 2, which is the pip value in USD, in other words, 1 pip of change in the exchange rate is a profit/loss of 2 USD.
- Example 2: In case of 30,000 units of USD/JPY, the pip value would be 30,000 × 0.01 = 300 JPY.
Conclusion
Understanding the concepts of a pip and a pipette is required if you want to trade Forex. You will need to understand the meaning, the common jargon, and the ways to calculate pip value.
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