What is a Pip in Forex?
A pip, short for percentage in point or price interest point, is the smallest numerical price move in the exchange market. When a price changes on the exchange it is generally measured in Pip/s or Pipettes. With most currency pairs the pip is located in the 4th decimal place ($0.0001). The pipette is located in the 5th decimal place but is rarely referred to other than as a precision indicator.
Pay note! In Japanese Yen pairs, the pip is equal to one hundredth of the counter currency and is represented in the 2nd place after the decimal point!
For most pairs a pip is equivalent to 0.01% or 1/100th of one percent. This value is also commonly referred to as BPS. A basis point (BPS) refers to a common unit of measure for interest rates and their financial percentages. One BPS is equal to 1/100th of 1% or 0.01% (0.0001) and denotes a percentage change in the exchange rate.
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Calculating pip value and position size
As mentioned, a pip is equivalent to a change of 1 point in the fourth decimal place in the exchange rate of the currency pair. Keeping that in mind here is how we calculate a pip move as well as price moves:
Calculating forex price moves
Now that we are clear on what a pip is let’s see how much money we can gain or lose for each movement.
The size of your position will influence this. With the same price movement in pips, larger positions will have greater monetary consequences on your balance.
This can be calculated very simply: Positions size x 0.0001 = Monetary value of a pip
Here is a quick example using the EUR/USD as we have above:
We open a position size of 10,000 units and calculate the pip value as follows: 10,000 (units) x 0.0001 (one pip) = $1 per pip.
When you open a BUY position and the market acts in your favour every pip movement will earn you $1.00; and the opposite is true if you SELL. If the markets are against your choice to either buy or sell, $1.00 will be lost per pip movement should the trend be against you.
Increasing or decreasing the number of units will have the same effect on the pip value.
Major currencies’ pips
Pip values vary per currency as they are dependent on how the currency is traded. On some trading platforms, though rare, it is possible to record a price move in half-pip increments; therefore the value of one pip is commonly a standard on most interfaces. However, it depends on the trading platform and the price feed. There are systems that show 4 digits (pips) and those that show 5 (pipettes).
The major currencies that are traded by investors/traders are the Japanese Yen (JPY), Great British Pound (GBP), US Dollar (USD), Euro (EUR) and the Canadian Dollar (CAD). These major currencies can be paired with each other or other more exotic currencies.
It is important to keep abreast of forex daily average ranges when trading, in order to gauge volatility in the Forex Market. Should the pairs not meet estimated ranges then you will not be hitting your profits and lower targets need to be set up.
Monitoring your ADR (Average Daily Ranges) closely is highly recommended by Friedberg Direct.
Here is an example of the major pairs price movements in pips on average per trading session:
|Forex Pair||New York||Tokyo||London|
Please note that with Yen-pairs, the pip is located in the 2nd place after the decimal point, and thus equal to a change of 0.01 or 1/100th of the quote currency.
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