What Is Pip In Forex? How To Calculate The Pip Value?
Being a Forex trader, you might have heard about Pips in Forex trading. In order to trade successfully, you need to understand the definition and the calculation of pip value.
On the other hand, a pip protects an investor from a huge loss.
In Forex, the “PIP” stands for the “point in percentage”. On the other hand, it is also known as the “price interest point”.
In the middle of this article, you will find examples that will help you to understand better.
Additionally, we will briefly cover the definition and method of calculation. We will also discuss pipette, the relation between spread and Pip, and many more.
Let’s start with a small introduction of Pip.
What Is Pip In Forex
Pip represents the smallest movement or price change of currency pairs. It is usually 1/10,00.
In the trading market, the trader calculates the pip value using the last Decimal points.
In the currency market, most major currency pairs are quoted to 4 decimal places.
Moreover, changes of the last decimal point represent the pip. The calculation is also applicable for SILVER and HEO.
Remember, there are a few currency pairs which are not quoted to the 4th decimal place. The exception of using fourth decimal points applies to the Japanese Yen (JPY). JPY is quoted to the 2nd decimal point.
The calculation is also applicable for some commodities such as GAS, OIL, GOLD, and BRENT.
The movement is equivalent to 1% or one basis point. Traders often use this to calculate trading gain or loss.
The value is quoted based on Oil, Gold, Brent, and Gas.
The basis point is indicating the percentage change in the financial movement. 1 basis point is 1/100 of 1%.
Here, if anyone says that 1% change in financial instrument then it will consider as 100 basis points. Similarly, a 0.01% change in the financial instrument will consider as a 1 basis point.
For example, the EUR/USD currency pair moved from 1.3030 to 1.3031. Therefore, we can state that the EUR/USD pair moved by 1 pip. One pip = 10 cents or 0.0001 or 0.01. When the USD/JPY Price moved from 77.60 to 77.61, we consider it a 1 pip movement.
What Is Tick And Cent
The movement of the 4th decimal point is a tick. Tick is similar to the pip.
1 tick is when the currency value point moves from one numerical number to another numerical number. For example, the price of a currency pair moves from $1.1005 to $1.1004.
Traders apply the same calculation method for those currency pairs, which are based on YEN.
Here, the change from $34.32 to $33.42 is a movement of 10 cents.
What Is Pipette In Forex
While trading you will notice that some broker’s platform offers a small amount of PIP which is known as a pipette. It is also known as fractional pips or 1/10.
For calculating it, the currency pair price is quoted to the 5th decimal point.
Suppose you are trading with the EUR/USD pair. The pair moves from 1.30335 to 1.30337. Here, the changes of Pipette are 2.
So, you are counting the 5th decimal point to find out the Pipette value.
Most of the time, you only deal with the pip value in the Forex trading but, it is necessary to have an idea on Pipette also.
Pip Value Calculator
It is necessary to calculate the value for each particular currency pair. The value of pip will help you to know the movement of exchange rates.
Moreover, you can manage your trading risk with the help of this.
It is an essential trading tool that helps traders to calculate the value of a pip.
Traders need to enter the currency pair, pip amount, trade or position size, and the base currency or the deposit currency.
After entering this information, the calculator will help you to calculate the true value of a pip.
You can use Online Pip Calculator to calculate your pip value.
How To Calculate The Pip Value
The value could be different depends on the currency pairs. You can calculate the value manually by using the formula. The value can be considered as 0.0001 or 0.01.
Additionally, to find out the monetary value of Pip, you have to multiply the lot size with the value of one Pip.
The monetary depends on three factors. These are:
- Traded currency pair
- Size of the opening position or trade
- Exchange rate
When the pair moves by 0.0001 or 0.01 depending on the price movement of a particular currency pair, your profit and loss will be counted.
Example:
Suppose you are trading EUR/USD pair.
The exchange rate of EUR/USD is $1.1136 and 1 pip value is 0.0001
To find out the monetary value, you have to divide the pip value by the exchange rate:
0.0001/1.1136 = 0.0000897 EUR (Monetary Value)
Suppose you are trading USD/JPY with an exchange rate of 77.60 and one pip is = 0.01.
For the YEN based currency pair, to find out the monetary value of a pip, you have to divide the pip value by the exchange rate:
0.01/77.60 = 0.000128 USD (Monetary Value)
Eventually, we can do this calculation for any trade size.
How To Calculate The Lot Value
In Forex, a lot means the number of currency units you are buying or selling. We have already discussed the Lot, in our Forex education sector.
To calculate the Lot value in one Pip, firstly, you have to decide the buying or selling units of a currency pair.
Suppose you wanted to buy 100,000 of EUR/USD pair at the exchange rate of $1.1136.
Here, 1 standard lot = 100,000
To get the value of each pip, you have to multiply the monetary value by the lot value. Hence, the value of each pip of your trading position is worth 8.97.
The calculation is here-
0.0000897 X 100,000 = 8.97
Profit-Loss Calculation
Above, we have calculated the monetary value of the Forex pip. Let’s have a look at how it works with the Forex deal.
Suppose you are trading with currency pair of EUR/USD
In the first place, we are going to sell 100,000 EUR/USD with an exchange rate of 1.1136. The price is the asking price of the currency pair.
Later on, the deal closed at the price of 1.1159.
Here, you have to deduct the asking price from the bid price and multiply with 10,000 to calculate the total pips.
$1.1136 – $1.1159 = 0.0023 X 10,000 = 23
So, you received 23 pips from your position.
On the other hand, to calculate profit, get the number of pips you gained and multiply that with the monetary value.
23 X 8.97 = $206.31
The Relation Between Pip And Spread
In the currency market, currencies are traded or quoted as pairs. There are actually two prices; one is the bid price, and another one is the ask price.
If a trader wants to sell a currency pair to a Forex broker, it will consider as the Bid price. Eventually, if any trader buys a currency pair from a broker, it will consider as the Ask or Offer price.
The spread is the difference between these two prices. However, the Spread is measured in Pips.
Instead of other charges, the broker only charges spread. The profit and loss calculation measure by the Pip value.
Final Words
Finally, the increasing and decreasing value represent a profit or a loss in Forex trading.
So, when your trade goes in a positive way, then you will make a profit. Similarly, when your trade goes in a negative way, then you will make a loss.
So, it is necessary to calculate the pip without having any mistake.
