Forex PIPs Explained

Forex PIPs Explained

  • Posted on 1313-1212-2021
  • by Gareth McCauley

The forex market is the biggest financial market globally, with over $5 trillion traded every day. While there are countless forex investors, few can successfully navigate the intricacies of the forex market, and even fewer end up making a profit.

If you are planning to enter the world of foreign exchange, you must have a firm first grasp of the basics. One of these basics is understanding what pips are in forex trading.

You’ve probably heard of the term pips and its many variations, such as pipettes and points. In this article, we will explain what they are exactly, how they work, and more.

 

What are PIPs in Forex?

In forex, a “pip” is a unit of measurement used to show the change in value between two currencies. Pip is an acronym for either “price interest point “ or “percentage in point.”

Generally, a pip refers to the fourth decimal point of a price. A pip is equal to 1/100th of 1%, which is also called one basis point. For example:

EUR/USD = 1.1052

In this case, the value of the pip is 2. While most currency pairs go out to four decimal places, some notable exceptions like the Japanese yen go out to only two decimal points. For example:

USD/JPY = 0.03

At first glance, a pip does appear as a minimal unit of measurement. However, forex traders are often heavily leveraged. It means even one pip difference can lead to a significant loss or profit.

 

What are Pipettes?

Some forex brokers often quote currency pairs differently than the standard “4 or 2 decimal places.” These brokers add additional decimal places called fractional pips, which are commonly known as points or pipettes.

A pipette is equal to 1/10th of a pip and is found as a superscripted number after the pip. Here’s an example:

GBP/USD = 1.3053²

JPY/EUR = 1.02³ 

In this example, the GBP/USD pair has 2 as its pipette, while the JPY/EUR pair has 3. Pipettes provide forex brokers with an even more precise indication of price movements.

 

Understanding Pips

To help you understand pip movements, here are a couple of examples:

  • If the USD/EUR moves from 1045 to 1.1055, that’s considered an increase of 10 pips.
  • If the USD/EUR moves from 1055 to 1.1025, that’s considered a decrease of 20 pips.

Here are some examples for the Japanese yen currency pairs:

  • If the USD/JPY moves from 30 to 107.50, that’s an increase of 20 pips.
  • If the USD/JPY moves from 50 to 107.40, that’s a decrease of 10 pips.

 

understanding-pips

 

How to Calculate the PIP Value

 A pip’s value will depend on three major factors:

  • Current exchange rate
  • Size of the trade
  • Currency pair being traded

Based on these factors, changes in even a single pip can significantly impact the overall value of your trade position.

Let’s assume a $50,000 trade that involves USD/EUR that closed at 1.3050 after gaining 50 pips. If you want to calculate the profit in USD, you can carry out the following steps:

Step 1: Determine the number of quote currency (EUR) that each pip represents.

What you need to do is multiply the amount of the trade by one pip (0.0001). Refer to the following formula:

50,000 x 0.0001 = 5 EUR per pip

Step 2: Calculate the value of the base currency (USD) per pip.

Now that you have the quote currency for EUR, divide that number by the current exchange rate to end up with the number of USD per pip:

5 ÷ 1.3050 = 3.83 USD per pip

Step 3: Determine the total profit or loss.

Once you have the necessary values, multiply the number of pips gained (5 EUR) by the value of each pip in USD:

50 x 3.83 = 191.50

At the end of your calculations, you will end up with a total USD profit of $191.50. If you arrive at a negative value, this indicates a loss.

 

When it comes to forex trading, it’s foolish to underestimate the importance of pips. Making the right investment decision depends on how you correctly read and understand pips. This blog is an excellent first step to learning the intricacies of forex trading. You can understand more by working with an expert.

Fair Forex offers one of the lowest commissions and spread in the foreign exchange industry. If you want to learn more about our services, contact us today. Our team would be happy to share tips on how you can succeed.