What is a Pip in Forex?
You would have heard of the term ‘pip’ by now if you are into Forex trading. This is where you need to do some arithmetic calculations since this is ultimately a game of numbers. Pips and Pipettes might sound new to you but they are probably among the most important lingo you will need if you intend to stay in the Forex game for the long haul.
Understanding Pips and calculating them
Make no mistake about it. Until and UNTIL you are totally comfortable with calculating the profit and loss and the pip values, you should not even think about Forex trading at all. So, what really is a pip? Pip is actually the unit used to measure the change in value of 2 currencies. For example, if USD/EUR moved from 1.1090 to 1.1093, the increase of EUR 0.0003 represents 3 PIPS. It is usually the last decimal place in a value. In Forex trading, you usually do it in pairs and they are represented up to 4 decimal places (except for certain currencies like the Japanese Yen which only goes to 2 places).
Then, what is a Pipette?
Pipettes simply means fractional pips. This occurs when the broker quote you on currency pairs that are unusual. That means instead of using the more common 4 and 2 decimal places, they use 5 and 3 decimal places instead. How is this represented then? For example, if the GBP/USD pair moved from 1.23455 to 1.23459, it means there was a movement of USD 0.00004 and that is 4 PIPETTES.
Calculating the value of a pip
Each currency has its own relative value and that means you need to know the value of the pip of the pair you intend to trade in. Using a standard 4 decimal point quote, assuming that the exchange rates are represented as ratios.
- For USD/CAD = 1.0300
- This can be read as USD1 is equivalent to CAD 1.0300
- The Pip Value is the value change in the counter currency multiplied by the exchange rate ratio
- Here, it is represented as [.0001 CAD] x [1 USD/1.0300 CAD]
- Or, [(.0001 CAD) / (1.0300 CAD)] x 1 USD = 0.00009709 USD per unit traded