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Whether you’re a brand-new trader or an old hand, understanding exactly what a pip represents and the correct way to interpret the value between currencies is of utmost importance, since pip values directly translate to profits and losses.

How Small Can You Go

We explain it in our courses but, it bears repeating as a standalone topic.

PIP stands for:

Percentage In Point

or

Price Interest Point

depending on your source definition, and is the smallest increment of trade in Forex up until a few years ago when brokers got tricky and started quoting prices in an extra place value, called a “pipette”.  This is 1/10 of a pip.  We’ll get to that in a moment.

Non-YEN Pairs:

Looking at non-Yen pairs such as the EUR/USD, EUR/CAD, GBP/NZD, etc. in the Forex market, prices are quoted to the fifth decimal point. For example, if the current price of a currency pair was priced at $1.29234, in the Forex market the pair would be represented as 1.29234.  See the place value break down below.


   

The value of the fourth decimal place is 3 pips.  The last digit is four-tenths of a pip (pipette) but for all practical purposes, we ignore the last digit in all of our calculations.  

Little Difference

It makes things easier and frankly, a tenth of a pip makes little difference anyway.  You don’t even have to round the pip value, just disregard it.

On a chart, it looks like this:

An example to calculate the difference between prices on a non-Yen pair works like this.

Trade entry price long:  1.19545 -> 1.1954 (ignore the last digit)

Trade exit price: 1.19866

Profit:  1.1986 – 1.1954 = 32 pips

To calculate pip value, divide one pip (in this instance  0.0001) by the current value of the currency pair. Then, multiply that figure by your lot size: the number of base units that you are trading.

For our example, 1 standard lot ($100,000) would be:

 

(.0001/1.1954) x (100,000) =

0.00008365 x 100,000 =

$8.365 per pip.

 

YEN Crossed Pairs

Yen crossed pairs such as the USD/JPY, GBP/JPY, EUR/JPY, etc. Among the major currencies, the only exception to that rule is the Japanese yen. One dollar is worth approximately 100 Japanese yen; so, in the USD/JPY pair, the quotation is only taken out to two decimal points (i.e., to 1/100th of yen, as opposed to 1/1000th with other major currencies).

Take Three Steps

That being said, Yen crossed pairs are quoted to three place values.  For example, if the current price of a currency pair was priced at $121.459, in the Forex market the pair would be represented as 121.459.  See the place value break down below.

The value of the second decimal place is 5 pips.  The last digit is nine-tenths of a pip (pipette) but for all practical purposes, we ignore the last digit in all of our calculations, just like in non-Yen pairs.  

On a chart, it looks like this:

An example to calculate the difference between prices on a Yen-crossed pair works like this.

Trade entry price short:  128.347 -> 128.34 (ignore the last digit)

Trade exit price: 128.281

Profit:  128.34 – 128.28 = 6 pips

To calculate pip value, divide one pip (in this instance  0.01) by the current value of the currency pair. Then, multiply that figure by your lot size: the number of base units that you are trading.

For our example, 1 standard lot ($100,000) would be:

 

(.01/128.34) x (100,000) =

0.00007792 x 100,000 =

$7.792 per pip.

What…me worry?

Some traders have said they don’t worry too much about the numbers because their trading platform keeps track of everything.  Not a good idea.  You really need to know everything about your trade; entries, exits, stops, limits, and risk values.

Does Not Compute

The chance for error increases dramatically when you’re unaware of the particulars, and mistakes in trading can be quite unhealthy to your bottom line.

More to Come

There’s a lot more to come.  If you haven’t signed up on our contacts page or subscribed to the YouTube channel, please consider doing so to receive notifications as we continue to publish helpful, relevant, and informative Forex related material to support your quest to becoming a better trader.

And, now you are better informed of what a PIP is and what its value is.

Learn More Here

Want to learn more about where and how to find/test/use better indicators?  Check out the Stonehill Forex Advanced Course HERE, for more information.

Our only goal is to make you a better trader.

BTW – Any information communicated by Stonehill Forex Limited is solely for educational purposes. The information contained within the courses and on the website neither constitutes investment advice nor a general recommendation on investments.  It is not intended to be and should not be interpreted as investment advice or a general recommendation on investment. Any person who places trades, orders or makes other types of trades and investments etc. is responsible for their own investment decisions and does so at their own risk. It is recommended that any person taking investment decisions consults with an independent financial advisor. Stonehill Forex Limited training courses and blogs are for educational purposes only, not a financial advisory service, and does not give financial advice or make general recommendations on investment.