Guide On Calculating A Pip In Forex Trading
In foreign exchange or Forex trading, a pip is short for percentage in point and is one of the most important concepts you need to understand. It is a popular term in the trading world, which refers to the smallest incremental price movement a contract can make in currency trading or other speculative markets when traded in lots of 100,000 units.
It is usually quoted to the fourth decimal place and hence referred to as a “4-pip profit” or a “-4 loss” for a given trade. Two decimal places are used to speculate on movements of less than 1/100 of a major currency unit relative to its appropriate index.
Pip stands for point in percentage terms, so if EUR/USD rises from 1.4500 to 1.4501, it gains one pip or 100 pips, depending on how it is quoted.
This post will show you how to calculate a pip and explain what it represents. We will also provide some examples to help you better understand this concept. So let’s get started!
What is a Pip?
A pip is the smallest increment of price movement possible when trading forex. It is usually quoted as four decimal places to USD and can be referred to as a ‘4-pip profit’ or ‘4-pip loss’. If you buy EUR/USD at 1.4500 and sell at 1.4501, that’s +1 pip (or 100 pips if you trade in large lots). [One point equals $10].
The term ‘point’ is used by forex traders much like stock traders use the term ‘tick.’ The difference between points and ticks is that they are much larger than ticks when trading forex. Whereas a tick is usually worth .01 or less, a point can be as high as $10 in the case of USD/JPY and as low as 1/100th of a cent for certain exotic currencies such as the New Zealand dollar.
What is a Pipette?
In Forex trading, pipettes are small pieces of quantifiable information that can determine what trades to do next. A pipette might consist of an individual trade representing one unit or 100 units, or it could mean two hours’ worth of transactions on EUR/USD (for example).
A trader analyses pips using technical analysis tools to assess whether they think prices will go up or down after they reach a certain level. If they believe that prices will rise, they may place a “buy stop” order slightly above the recent high to catch a possible breakout or place an appropriate limit order in anticipation of such a breakout.
They may add to their position if their previous stop is hit and the market turns around again and begins to move up. On the other hand, if they think prices will fall after reaching a certain level, they could place a “sell stop” order just below this level and set an appropriate limit sell order if it gets executed.
How to Calculate the Value of a Pip?
The value of one pip depends on the currency pair traded and what tenor (time) is being traded. The pip value is usually quoted in 4 decimal places to USD. However, the pip value will differ for some exotic currencies depending on the tenor being traded.
Let’s assume that you are trading EUR/USD with a tenor of 1 hour and have an account balance of $5,000. This means that each pip is worth $10 for this pair at this time frame. If you now decide to go long EUR/USD with a position size of 100 lots (meaning that you currently own 100,000 Euros), then our new Pip Value would be as follows:
100 x 10 US Dollar per Pip = 1000 US Dollars per Pip
The result is that each point gained or lost amounts to $1,000 in your trading account.
How to Find the Pip Value in Your Trading Account’s Currency?
The value of one pip depends on the currency pair being traded and what tenor is being traded.
Let’s assume that you are trading EUR/USD with a tenor of 1 hour and have an account balance of GBP. This means that each pip is worth £10 for this pair at this time frame. If you now decide to go long EUR/USD with a position size of 100 lots (meaning that you currently own 100,000 Euros), then our new Pip Value would be as follows:
100 x 10 Euro per Pip = 1000 Euro per Pip
Since every one Euro is worth 0.86 Pounds, this means that each point gained or lost amounts to £860 in our trading account.
How is Pip Value Used in Forex Trading?
As mentioned before, pips are used as a unit of measurement for the size of one’s trading positions (in forex, you only trade with 100 times leverage). This can be extremely useful when an investor wants to put on many trades and then calculate the total profit or loss they will incur at the end of their trading session without doing all of this math manually.
However, it should be noted that some brokers (especially those offering MT4 accounts) display pip values that have been rounded up to 1 decimal place, so it is always important to clarify with them the exact number of decimal places they are using for this calculation.
It should also be noted that pips are generally used as an indicator for traders but are not usually accessible directly through your trading platform.
Conclusion
Learning how to calculate a pip in forex trading can be confusing at first, but with this guide, you’ll know what it means and how. A pip is the smallest unit of change for currencies traded on Forex markets. It’s also called one point or 1/100th of a percentage point (0.0001).
Calculating pips may seem like an intimidating task, but once you learn the fundamentals, calculating them will come naturally as they are used regularly during trades and transactions!
We hope that reading through our post about how to calculate pips in trading terms has helped clear up any confusion there might have been about understanding their meaning and value.