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Thursday, June 24, 2021

WHAT IS A PIP

Pip stands for ‘percentage in point’; by definition, a ‘Pip’ is the minor change that you can have in a currency pair, and an increase or decrease of one pip represents a change in the price of 1/100th of 1%.

Currency pairs except for Japanese Yen pairs has four decimal points. The change in pip starts from the fourth decimal point, as shown in the example below:

EUR/USD price = 1.1966

A change in price to 1.1965 is equal to one pip change.

1.1966 – 1.1965 = 0.0001

This is the slightest move that the currency pair can make, 0.0001 or one pip. The difference between the bid and ask price is referred to as pips.

Japanese Yen pairs are quoted with two decimal places. See the example below:

USD/JPY price = 108.76

In these cases, the pip is 1/100th divided by the exchange rate. Therefore, one pip is equal to 1/100 ÷ 108.76, which is 0.0000919.

What is a Pipette?

Some brokers quote the currency pairs from 4 and 2 to 5 and 3 decimal places. These are fractional pips or called pipettes.

E.g., GBP/USD price is quoted as 1.325456, ‘6’ is the 5th decimal place. If the price increases from 1.325456 to 1.325459, the difference is 0.0003USD pipettes.

You will notice on some broker platforms; the 5th  digit appears as a super scripted digit:

 

How to calculate the value of pips

The pip value depends on the method of quotation. In the American quotation convention, a pip is worth $10 for standard lot size and for a  mini lot, worth $1. Currencies quoted in this method is CAD, AUD, NZD, and GBP.

The European convention quotes the value of a pip as the second currency. For example, USD/CHF, one pip is worth 10 CHF and can be translated into dollars depending on the exchange rate at closing of the trade.

E.g., if you were to buy GBP/USD with a mini lot size at 1.37814 and sold it at 1.37764, you would have profited 50 pips. For a mini lot (10,000 units), the value of the 50 pips would be $1 per pip, therefore profiting $50. If you used a standard lot (100,000 units of the base currency), the profit would be ten times the mini lot, $500.

An example of a USD/CHF trade, the pip difference would be valued in Swiss francs.

E.g., if you bought USD/CHF at 0.9219 and sold it at 0.9169, you would have profited 50 pips.

To calculate the value of the 50 pips, you can use the following formula:

       

An Example of the Japanese yen pip value calculation: You bought USD/JPY at 108.82 and sold it at 109.32, you would have gained 50 pips.

The formula is as follows:

There are forex calculators that can determine the above values for you without manual calculation.