To be able to master forex trading and generate profit you must master the basics first. Pips are the smallest unit in forex and are always used while trading. No matter what strategy you use you must know how Pips work to become a successful trader. In the following paragraphs, you will be introduced to the concept of pips and how they are used in forex. By the end of this article, you will know the ins and outs when it comes to using pips in forex trading.
What are Pips in Forex?
The term pip is short for price interest point. They are the smallest whole unit in price move that a trader can make in forex. Pips in currency pairs are usually the fourth decimal point for example 0.0001 is one pip, making it equal to 1/100 of 1%. The Japanese Yen is excluded from this rule of four decimal points and instead uses only two decimal points, an example of 0.01 is on pip.
In forex currencies are traded against each other, and any movement in price is expressed as pips. The value of each pip is different from one currency pair to another. To better grasp how pips are used in forex let’s give a simple example. You bought a currency pair at 1.1262 and sold it for 1.1268, in this transaction you have made 6 pips. After that, you calculate how much each pip is worth in that currency pair.
Pipettes are a fraction of a pip used to acquire a more accurate measurement. One pipette is one-tenth of a pip. This allows the trader to view EUR/USD currency pairs at five decimal points, and currency pairs with the JPY at three decimal points.
How to calculate pips in forex?
Pip value is different from one currency pair to another. When it comes to U.S. dollars the pip is fixed to 0.0001 when USD is the second in the pair. In this case, one pip is created by increasing the trade amount (or lot size) by 0.0001. Therefore, multiply a trade value of, say, 10,000 euros by 0.0001 for the EUR/USD pair. $1 is the pip value. If you bought 10,000 euros against the dollar at 1.0810 and then sold it at 1.0821, you would have profited 11 pips ($11).
However, when the USD is the first of the pair (or the base currency), as it is in the USD/CAD combination, the pip value also contains the exchange rate. The trade amount multiplied by the exchange rate determines the size of a pip. As an example, multiplying 0.0001 by the usual lot size of 100,000 at a USD/CAD exchange rate of 1.2829 results in a pip value of $7.79. If you purchased $100,000 at 1.2829 and then sold it at 1.2832, you would have earned a profit of 3 pips, or $23.37.
An exception to all this is the Japanese Yen, with its pairs quoted at two decimal points. In a currency pair such as the EUR/JPY the pip value is 0.01 divided by the exchange rate. To better understand this let’s take an example. If the EUR/JPY is quoted at 141.53, to calculate one pip we divide 0.01 by 141.53 equaling 0.0000706. If our lot size is 100,000 euros, one pip will equal $7.06.
All these equations are calculated for you by your broker on their trading platform. Knowing how to calculate by yourself is also important. It helps you have a better understanding of how the market works.
Conclusion
Pips in forex are the smallest whole unit in price move that a trader can make. They are the fourth decimal point of the price except the Japanese Yen at two decimal points. Knowing how to calculate pips can be very useful and help grow your trading skills. All profit made while trading in forex is expressed as pips, and each pip has its value based on the currency pair.
