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