What is a pip in Forex? Definition, examples and more • Benzinga


The value of each currency is quoted on the huge foreign exchange or forex market against that of a paired currency. This system arises because all transactions in the spot forex market involve simultaneously buying one currency and selling another in a currency pair at a market-determined exchange rate.

A key piece of forex trading jargon that aspiring forex traders should generally know is what is called a pip. As a result, most forex trading courses will include a section on what a pip is in forex trading.
If you are new to forex trading and have wondered about the meaning and values ​​of pips, read on for a detailed discussion of these topics below.

What is a Pip?

The jargon term pip has come about as an acronym for “percentage point” since a pip is the equivalent of 1/100 of 1% or one basis point. The cash value of a pip or pip value may differ between forex currency pairs and is based on exchange rate levels in some cases.

In practice, a pip in forex represents the minimum incremental change in the exchange rate of a currency pair based on the convention of the foreign exchange market. Forex traders also typically measure the bid/ask spread of currency pairs and their trading gains or losses in pips.

Exchange rates for most currency pairs are quoted to four decimal places, so the smallest incremental change is to the fourth decimal place or 0.0001. For some currency pairs, such as those that include the unusually low value Japanese Yen, a one pip change occurs in the second decimal place or 0.01.

How to use a pip?

Forex traders can use pips to quickly calculate the amount gained or lost on a trade by taking the difference between the entry and exit exchange rates and multiplying by 10,000. Although profit and loss can also be expressed in a sum of money, it is a more complicated calculation which depends on the amount exchanged and possibly on an exchange rate.

Reporting trading results in pip amounts may make the most sense to a trader due to its simplicity. Trade results reported in pips can also be more easily compared between different currency pairs and position sizes.

Forex brokers and market makers generally do not charge transaction fees or commissions, although they quote a trading spread between bids and offers that varies in width between different currency pairs depending on their liquidity. and the competitiveness of the party making the quotation.

As an example of a trading spread, a quote obtained from a forex broker of 1.0700/05 for the GBP/USD currency pair is 5 pips wide. This same quote also implies that the broker is simultaneously ready to buy GBP and sell USD at 1.0700 and to sell GBP and buy USD at 1.7005.

The trading spread can be used to compare the quality of forex quotes obtained from different brokers. The difference between the bid and ask exchange rates in the transaction spread is usually expressed in pips. Forex brokers and financial institutions looking to make more money from their clients could increase the bid-offer spread.

If you are a client of a forex broker, the bid displayed on the left in an exchange rate quote is the best exchange rate at which you can sell the base currency of a particular currency pair to that broker. The offer exchange rate shown on the right is the best rate at which you can buy the base currency of this pair from the broker.

In a relatively recent development, some brokers also allow fractional pip quoting in highly liquid currency pairs. As an example, the trading spread for the quoted EU Euro against the US Dollar (EUR/USD) can often be less than a pip, especially if the quote is obtained by merging the best rates obtained from from several liquidity providers.

How to calculate the value of a pip

To calculate the monetary value of a pip, or pip value, you first need to know the trade size, which is often measured in lots that can be of different sizes. At most forex brokers, standard lots consist of 100,000 base currency units, while mini lots have 10,000 units, micro lots have 1,000 units, and nano lots consist of just 100 base currency units. .

The method of calculating the pip value in US dollars also varies depending on whether the USD is the base currency or the counter currency in the currency pair.

When the US dollar is the counter currency, such as in EUR/USD, GBP/USD, AUD/USD and NZD/USD, the value of a pip or 0.0001 movement in the exchange rate for a one-lot position of 100,000 base currency units is always 0.0001 x 100,000 = $10. For such pairs, the pip value of a mini lot is $1, while that of a micro lot is $0.1 and that of a nano lot is $0.01.

For currency pairs that have the US dollar as their base currency, such as USD/JPY, USD/CHF, and USD/CAD currency pairs, the current exchange rate should be used to calculate the monetary value of a pip . This factor complicates things somewhat since the value of the pip in US dollars changes depending on the level of the exchange rate.

For example, if the prevailing USD/JPY exchange rate is 144.65 and you are trading a standard lot of 100,000 base currency units, the value of one pip is 100,000 x 0.01/144 .65 = $6.913. For a mini lot of 10,000 base currency units, the pip value is 10,000 x 0.01/144.65 = $0.6912 and for a micro lot, the pip value is 1,000 x 0.01/144.65 = $0.0691.

If the exchange rate dropped significantly to 120.00, then using the previous formula, 100,000 x 0.01/120.00 would result in a higher pip value of $8.333 instead of a pip value of $6.913 when the USD/JPY exchange rate was 144.65. If the exchange rate were to go back up to 165.00, the pip value would decrease to $6.061.

As you can see, the exchange rate plays an important role in calculating pip values ​​when the US dollar serves as the base currency in a pair.

Pips and profitability example

Many traders use pips as a simple way to quantify their trading gains or losses. As an example, consider the case of a trader who bought $100,000 and simultaneously sold $95,000 at a EUR/USD exchange rate of 0.9500.

If the EUR/USD exchange rate moved from 0.9500 to 1.0200, this represents a profitable rise of 700 pips. The value of the trader’s $100,000 position would then have increased to $102,000 in US dollars, giving them a net gain of $7,000.

Conversely, if the EUR/USD exchange rate had fallen to 0.8900, then their position of 100,000 euros would have lost them (0.9500-0.8900) x 10,000 = 600 pips. Their long position would then only be worth $89,000 and would therefore have lost $6,000 in US dollar value.

Getting a true understanding of a pip in Forex

A pip is very useful as a measure of exchange rate movement for currency pairs. It allows you to compare transactions in any currency pair, and a transaction can be compared regardless of its transaction size or the exchange rate of the relevant currency pair.

Pip-based indicators like the ATR can also help you gauge the risk of trading a currency pair. You will also get important information from the ATR about a pair’s volatility and trading range. It can be tedious to calculate a pip value manually, so most online brokers offer web-based pip calculators that simplify the process for you.

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Frequently Asked Questions

questions and answers

Q

Which currency pair has the highest pip value?

A

The EUR/GBP cross rate of 0.8960 currently has a relatively high pip value of $10.67 for a standard lot size of 100,000 base currency units given the current GBP/USD exchange rate of 1, 0670. In contrast, the USD/CHF pip value for one standard lot stands at $10.05 given at an exchange rate of 0.9950, while all currency pairs with the US dollar as the counter currency, including the major pairs EUR/USD, GBP/USD, AUD/USD and NZD/USD, have a pip value of $10. These pip values ​​are all significantly higher than the current pip values ​​of $6.193 for USD/JPY at an exchange rate of 144.65 and $7.259 for USD/CAD at an exchange rate of 1.3775.

Q

How much is a pip?

A

For forex trades involving the US dollar as the counter currency, a profit of 1 pip would amount to $10 on a standard lot of 100,000 units of base currency, $1 on a mini lot of 10,000 units and 0, $10 on a micro lot of 1,000 units. For FX trades on crossovers like EUR/GBP and on currency pairs where the US dollar is the base currency like USD/JPY, the value of a pip in US dollars varies depending on the rate. market exchange to convert the counter currency of the pair to US. dollars.

Q

How much is a pip on the US30?

A

The US30 is a tradable index based on the premier US stock market index commonly known as the Dow Jones Industrial Average (DJIA). Stock index traders typically use points (incremental changes on the left side of the decimal point) instead of pips (changes in the 4th decimal place) to measure US30 gains and losses.


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