What’s a Pip in Forex Trading?
When trading forex, you might hear the terms “pip”, “pipette”. Here’s a simplified breakdown:
- Pip: It’s a unit to measure the change in value between two currencies. If EUR/USD moves from 1.1050 to 1.1051, that 0.0001 change is one pip. It’s usually the last decimal of a price. For most currency pairs, this is at 4 decimal places, while for some like those involving the Japanese yen, it’s at 2 decimal places.
- Pipette: Some brokers use an additional decimal place. These are called pipettes or fractional pips. It’s one-tenth of a pip. So, a movement from 1.30542 to 1.30543 is a change of one pipette.
- Calculating Pip Value: Every currency has a different value, so the value of a pip varies based on the currency pair you’re trading. The value can be calculated using the change in the counter currency times the exchange rate ratio. Here’s an example:
- For USD/CAD = 1.0200:
- A one pip change is roughly a 0.98 USD change for a 10,000 unit trade.
- For GBP/JPY = 123.00:
- A one pip change would mean approximately 0.813 GBP for a 10,000 unit trade.
- For USD/CAD = 1.0200:
- Translating Pip Value: In a global market, accounts can be in different currencies, so sometimes you need to convert the pip value to your account’s currency. This involves simple multiplication or division using the relevant exchange rate.
- For instance, a pip value of .813 GBP can be converted to USD using the GBP/USD exchange rate.
The good news? Most forex brokers calculate this for you. But it’s helpful to understand the math behind it.