What is a pip in forex trading, and how do you calculate pips? It’s no fun to find them in fruit, but in forex trading, finding pips is pretty much the name of the game. This article will explain pips and give you a clear understanding of how they work.
What does pip stand for?
In forex trading, pip stands for percentage in point or price interest point.
Right, so what does pip mean?
It’s really simple. Pips are really small increments that we use to measure changes in the price between two currencies.
You already do this every day with cents. You count cents starting from the second place after the decimal point.
With pips, you count from the fourth digit after the decimal point.
One pip is one-hundredth of a cent.
There are one hundred pips in a cent, just like there are one hundred cents in a dollar.
This is also true for the British pound (GBP). There are one hundred pips in a penny and one hundred pennies in a pound.
In fact, this is true for almost all of the major currencies, such as the Euro, and the Australian, New Zealand, and Canadian dollars.
As we said, you count pips from the fourth digit after the decimal point.
Therefore, using GBP/USD as an example, a price change from 1.22041 to 1.22051 is an increase of one pip. Easy
The Japanese Yen
The big exception to this rule is the Japanese Yen (JPY).
With USD/JPY, for example, we count pips from the second place after the decimal point. So for example, if the exchange rate rises from 132.54 to 132.64, that’s an increase of ten pips.
This is because one yen is already much closer in value to a cent than a dollar. There’s no need to break it down into even smaller units.
How to count pips
As we said, it’s really easy. Count from the fourth decimal place, almost as if you were counting cents in a dollar.
Using GBP/USD as an example again, a price change from 1.22131 to 1.22471 would be an increase in price of 34 pips. Easy.
And another example, a price change from 1.22135 to 1.23135 is an increase of 100 pips – or one cent.
So what about the fifth number after the decimal point?
The fifth digit after the decimal point is known as a pipette. A pipette is one-tenth of a pip, so obviously, there are ten pipettes in a pip.
So, a price change from 1.22131 to 1.22475 is an increase of 34.4 pips.
As you might expect, it works slightly differently for the Japanese Yen. For JPY, you would count pipettes from the third place after the decimal point. So 132.542 to 132.549 is an increase of 7 pipettes (or 0.7 pips).
Ticks vs. Pips – what’s the difference?
Many people use ticks and pips interchangeably, but they are not the same thing. A tick is the smallest possible price increment. You could count ticks by starting with the digit furthest to the right of the decimal point. On the other hand, a pip is very clearly defined as a price change to the fourth decimal place (or the second for JPY).
Pip value – what is a pip worth?
This depends entirely on the forex pair being traded, and the size of the trade itself. Let’s say, for example, in a trading account whose currency is USD, a standard 1 lot trade of GBP/USD is placed.
In this case, 1 pip is worth $10 USD.
And to break the example down a little bit further:
- On a 0.1 lot trade, 1 pip is worth $1
- On a 0.01 lot trade, 1 pip is worth $0.10
Of course, if the currency of the trading account is GBP and not USD, then in terms of this trade, 1 pip technically still is $10, but this would obviously be converted and presented in GBP. This conversion isn’t necessary if the quote currency (the second currency) in a currency pair being traded is the same as the currency of the trading account.
If your trading account is in USD, then here’s a handy little rule of thumb:
1 Standard lot trade on an XXX/USD forex pair – 1 pip = $10 USD
We’ll do another quick example. Let’s say your trading account is in Swiss Francs (CHF), and you place a standard 1 lot trade of USD/CHF. In this trade, one pip has a value of 10 Swiss Francs.
Let’s say you placed a buy trade at 0.94169. The price went in your favor and rose to 0.94189. That’s an increase of 20 pips. Therefore, you made 200 Francs.
How to work out pip value
Of course, it’s relatively simple to calculate the value of a pip when the quote currency is the same as the trading account’s currency. You may be able to do this in your head based on the lot size alone.
But what happens if you can’t?
Don’t worry – working out the value of a pip is still really easy.
Simply divide 0.0001 by the exchange rate, and then multiply this figure by the amount of units you are trading. Not the lot size, but the amount of individual units.
Here’s an example.
Your account is in USD. You place a 0.75 lot trade of the Euro to the Australian Dollar (EUR/AUD).
At the time of writing, the EUR/AUD exchange is 1.45312.
So we divide 0.0001 by 1.45312, which gives us 0.00006881744.
We then multiply 0.00006881744 by the number of units we’re trading. It’s a 0.75 lot trade – so that’s 75,000 units.
0.00006881744 multiplied by 75,000 is 5.161308.
1 pip is therefore worth $5.16 USD.
Japanese Yen pip value
It’s pretty much the same calculation, but instead of dividing 0.0001, you divide 0.01 by the exchange rate and then multiply the result by the number of units being traded.
Pip calculator tool
CashBackForex.com has a fantastic little tool that will calculate the value of a pip or pips for pretty much any forex pair you can think of. It’s a great solution if you’re in a hurry. However, we think it’s really important to be able to calculate the value of a pip yourself. It only takes two simple sums, and the value of a pip will play a key role in terms of money and risk management, which you should understand before entering any trade.
Check out the pip calculator below.