An Introduction to Pips in Forex Trading
In this lesson, we will explore how changes in the value of a trading instrument are measured.
Understanding pips in forex trading
In forex pairs, a pip is the smallest amount of change in a currency pair. A pip measures the
movement in exchange rates. It represents one-hundredth of 1% (1/100 x .01) and is placed
in the fourth decimal place (0.0001).
For example, if EUR/USD is priced at 1.1110 today and increases to 1.1121 tomorrow, the pair
has moved up by 11 pips.
Japanese yen
Japanese yen (JPY) pairs are an exception to the four decimal place rule as they are quoted
with two decimal places. If you’re trading the EURUSD, a pip is worth 0.0001, while with the
USD/JPY one pip equals 0.01.
Fractional pips or pipettes
Fractional pips, or pipettes, are units of price movement in forex trading. A pipette is a fraction
of a pip, equal to one tenth of a pip and is placed in the fifth decimal place in currency pairs.
Fractional pips give more accuracy when calculating profits or losses.
Monetary value of a pip
A pip also has a monetary value, which depends on three factors: the currency pair, the
exchange rate, and the size of the trade.
Example
If you trade one lot in EUR/USD, a change of one pip equals $10. For instance, if you enter a
long position in EUR/USD at 1.1100 and it moves up to 1.1200 the pair has moved upwards
by 100 pips – you would have gained $1,000. This is because your position size was €100,000
and the exchange rate increased by 0.0100 (or 100 pips). Therefore, your profit is equal to the
position size multiplied by the change in the exchange rate:
100,0000*0.0100=$1,000.
• Your profit is $1,000
• Each pip of the EUR/USD movement is $10.
Calculating pip value
To express this as an equation:
Pip value = Pip size * Position Size.
For each pip of one lot of EUR/USD:
€100,000*0.0001 = $10
To convert the pip value back to the base currency, divide the pip value by the current
exchange rate:
Pip value = (Pip size * Position size) / (Ex. rate))
For example, if your account is in GBP and you want to work out the pip value in GBP, convert
the dollar pip value by using the GBP/USD rate. So, for 1 lot:
$10 / (GBP/USD)
Use of pips
Pips apply only in the FX market. The change in the value of stocks, gold and oil is typically
measured in dollars and cents, reflecting the monetary value of each unit of the asset.
However, the change in value of indexes, especially for shares, is measured in ticks.
In the next lesson, we will discuss the various types of orders that traders can use to start
trading.