What Is A Pip In Forex
Short term for percentage in point’, a pip is the smallest price movement that a currency can make in forex trading. Traders make use of pips when it comes to measuring the price movements in currencies. However, the value of a single pip might differ from currency to currency.
While the number of pips depends on the forex pair needed to trade, finding the number of pips is a straightforward process. Let’s learn more about pips and their importance when it comes to trading forex.
PIP IN FOREX TRADING EXPLAINED
As said, a pip is a small price increment intended for a currency pair. Suppose, if the price of a certain currency pair moves down or up by 0.0001, you can say that the price moved 1 pip. So, when the price moves down or up by 0.0007, you can say that it moved 7 pips.
Let’s understand the concept in detail by taking an example. Suppose the price of the USD/EUR forex pair moves from $1.0760 to $1.0768, the USD/EUR is said to be increased by 8 pips ($0.0008). And, if the USD/EUR price increases from $1.0760 to $1.0796, you can say that it went up 36 pips ($0.0036).
The above examples show that pip is expressed by using the fourth digit right after the decimal. However, certain currency pairs are expressed by using the second digit following the decimal. So, the Yen-based pips such as AUD/JPY, USD/JPY, GBP/JPY, EUR/JPY, etc. are expressed by using two digits placed after the decimal.
When the USD/JPY moves from 120.20 to 120.90, you can say that the price increased by 70 pips or 0.70. Simply put, pip is the standard unit used to measure the extent of the exchange rate in terms of value change.
In general, a forex pip was considered an effective smallest increment through which a specific forex price would move. However, with the introduction of different methods used for pricing, the original definition of forex pip doesn’t hold well.
Traditionally, forex prices were quoted to a specific number of decimal places and the most common was four. Besides, a forex pip was considered a one-point movement following the decimal place quoted. Since then, the whole concept of forex pips has undergone slight changes.
These days, most traders tend to quote forex prices by adding another extra decimal place. And, it means that a forex pip is no longer counted as the final decimal place in a quote. Pips tend to remain as a standardized value across all platforms and brokers. It is a unit of measurement that allows traders to communicate in the same frequency without any kind of confusion.
HOW CAN YOU MEASURE THE CURRENCY PIPS ON A FOREX CHART?
There are certain basic steps that you need to follow when measuring currency pips on a forex chart.
* Get the movement of price on the forex chart
* Find out the starting point of the move
* And, mark the endpoint of the move
* Next, subtract the beginning price of the move from the end price of the move
HOW DO YOU CALCULATE FOREX PIPS?
Now that you have understood what pips in the forex are, it is equally important to know how to calcite pips in the forex. For almost every currency pair, a single forex pip is a movement that takes place in the fourth decimal place. However, the most notable exception is the forex pips that involve the Japanese Yen.
So, for the pairs that involve JPY, a single forex pip is the move that happens in the second decimal place. To understand more about forex pips, let’s study an example. When you multiply the position size by 1 pip, it gives you the value of 1 pip. Suppose, you want to trade EUR/USD currency pairs after buying one lot.
1 lot is worth 100,000 EUR. Consider 1 pip as 0.0001 for EUR/USD. Hence, the currency value for 1 forex pip will be 100,000 x 0.0001 = $10. Therefore, you can calculate that the gain or loss might be $10 per pip for the said forex pair. Here is another example of a forex pip to illustrate its meaning.
Suppose, you want to purchase EUR/USD at 1.16650 and close it later by selling a lot at 1.16660. So, the difference will be 0.00010. It means, the difference will be 1 forex pip. And, you will make a profit of $10.
UNDERSTANDING MORE ABOUT FOREX PIP IN TRADING
Suppose, you opened a position at 1.16650 and purchased one contract. This equals purchasing 100,000 EUR. Theoretically, you are selling Dollars to buy Euros. So, the value of the dollars that you are selling relies on the exchange rate.
* USD/EUR: 100,000 Euro x 1.16650 = 116,650 USD
* You close your position at 1.16660 by selling a single contract. Now, you are selling Euros and buying Dollars
* USD/EUR: 100,000 Euro x 1.16660 = 116,660 USD
* It means that you sold $166,650 and earned a profit of $10 with $166,660. So, 1 pip movement in your favor has made you earn $10.
A single move of one forex pip is worth 10 units of the quoted currency in the exchange rate when you are transacting a size of one lot. Similarly, a move of 10 forex pips is worth 100 units of the quoted currency. And, a 100-forex pip move is worth 1000 units of the quoted currency.
WHAT ABOUT THE CURRENCIES THAT AREN’T QUOTED TO 4 PLACE DECIMALS?
Of all the currencies the most notable one is the Japanese Yen. It is quoted to two decimal places and the pairs are governed by its second decimal place. So, if you sell a lot of the USD/YEN with a downward movement of one pip, it helps you to earn 1000 Yen. Furthermore, if your account has a currency that differs from the quoted currency, it impacts the forex pip value as well.
CONCLUSION
A pip is a measurement of the exchange rate movement intended for currency pairs. You can compare trades regardless of the exchange rate of a said currency pair or its size. Traders use pips to determine the extent of profit or loss. Also, it plays an important role in managing risks.