What is a Pip?

 What is a Pip?

You’ll need to become very familiar with the term 'Pip' if you’re going to indulge in online forex trading.

As an acronym for 'price in point' or 'percentage in point', a pip is the fourth decimal point used in pricing. It’s equivalent to 1% of one basis point. As most currency pairs are priced to 4 decimal points, it’s the smallest price move that an exchange rate can make (0.0001).

Now, it’s an important term to know for currency trading because the spread (we’ll get to that later) is actually quoted in pips. We’ll look at the spread a little later!

Let’s look at an example to make it a bit clearer:

Forex

You’d like to trade the EURUSD. The price of the EURUSD is 1.1060. Before you’re about the enter the trade, you see that the price changes to 1.1059. This means that there has been a fall in price by one pip, or 0.0001.

It’s important to remember that although most currencies are quoted to 4 decimal places, some currency pairs, like the Japanese Yen is actually quoted to two decimal places.

What is a Pipette?

Now that you’re familiar with a pip, it’s also important to know that the MT4 trading platform actually shows prices beyond the standard 4 or 2 decimal places.

A pipette is a fractional pip and can be up to 5 or 3 decimal places. It’s effectively 1/10th of a pip. Check out the image below so you can get a better idea of how pips should be read.

What Is a Pipette?

Comfortable with what a pip and pipette is?

Comfortable with what a pip and pipette is? Great! Now we’re going to move into working out the value of pip! Each currency’s value fluctuates, so for us to be able to trade, we’ll need to be able to calculate the value of a pip for the instrument that we want to trade. It can be done in two simple steps!

STEP 1

Divide 1 Pip (0.0001) by the current market value of your chosen pair.

STEP 2

Multiply that figure by your lot size.

Let’s check out an example

Forex

EURUSD’s price is currently at 1.5510 and your lot size is a mini lot or, 10,000. The value of the pip is: (0.0001/1.5510) X 10,000 = 0.6447

In this example, should the market move by one pip, you’ll earn or lose 0.6447 EUR.

It’s important to note that the pip value is defined by the quote currency. In our example above that is the EUR. However, when the quote currency is the USD the value of a pip is always the same! This means that should the lot size be 100,000, one pip will be equal to $1.

Your broker will actually be calculating the value of a pip for you, but it is something that every forex trader should know!