In forex trading, a “pip” stands for “percentage in point” or “price interest point.” It is the 2nd smallest unit of price movement in the exchange rate of a currency pair. For most currency pairs, a pip is typically the 2nd to last decimal place of an exchange rate, except for pairs that involve the Japanese yen, where a pip is the second decimal place.
For most currency pairs, a pip is the fourth decimal place of the exchange rate. For example, if the EUR/USD moves from 1.2500 to 1.2501, that is a ONE pip movement.
For currency pairs involving the Japanese yen, a pip is the second decimal place. For example, if the USD/JPY moves from 110.502 to 110.512, that is a ONE pip movement.
Pips are crucial in forex trading because they determine the price movements, profits, and losses. Understanding pips helps traders calculate their potential gains or losses accurately and manage their risk effectively.
What is a Pipette/ Points?
In forex trading, a pipette, also known simply as a “point” or a “fractional pip,” represents a smaller increment of price movement than a standard pip. While a pip is typically the 2nd to last decimal place in most currency pairs, a point is the last decimal place.
A point is one-tenth of a pip, which means it is the last decimal place in currency pairs where the standard pip is the 2nd to last decimal place.
Examples:
if the EUR/USD moves from 1.25000 to 1.25001, that is a one point movement.
If the USD/JPY moves from 110.500 to 110.501, that is also a one point movement (since for JPY pairs, a pip is the second decimal place).
The calculation for a pip.
Calculating the value of a pip in forex trading depends on several factors, including the currency pair being traded, the size of the trade (contract size), and the exchange rate.
Pip Value = Pip in decimal places * Trade Size
- Let’s say you are trading EUR/USD with a trade size of 1 standard lot (100,000 units).
- One pip in EUR/USD is 0.0001 (fourth decimal place).
Therefore, the pip value would be: Pip Value = 0.0001 * 100,000 = 10 USD
This means each pip movement in this trade would be worth 10 USD.
For currency pairs where your account currency is NOT the same as the base currency, you need to convert the pip value into your account currency using the current exchange rate.
If your account is denominated in GBP and you are trading EUR/USD (where USD is the quote currency), you would convert the USD pip value into GBP using the GBP/USD exchange rate.
