What is a Pip in forex trading?

What is a pip? This article will answer this question, explaining the meaning of a pip and how useful a concept is when trading Forex.

Forex pips explained

A pip is a gradual price movement, with a specified value dependent on the market in question. Put simply, it is a basic unit for measuring how much an exchange rate has changed in value.

Initially, a pip was effectively the smallest increment in which a forex price would move, although with the coming of a more precise way of pricing. Forex prices were quoted to a set number of decimal places – most commonly 4 – and, initially, a pip was a one-point movement in the final decimal place quoted.

Many brokers quote forex prices to more decimal places;  this means that a pip is often no longer the final decimal place within a quote. It remains a united value across all brokers and platforms, making it very useful as a measure that permits traders to always communicate in the same terms without confusion. 

Calculating the value of a pip

For top currency pairs, one pip is a movement in the 4th decimal place. The most notable exceptions are those FX pairs including the Japanese Yen. For pairs including the JPY, one pip is a movement in the 2nd decimal place.

What are pips?

Multiplying your position size by one pip will respond to the question of how much a pip is worth. If you want to trade the EUR / USD pair, and you decide to buy one lot. One lot is worth 100,000 EUR. 

One pip is 0.0001 for EUR / USD. The currency worth of one pip for one lot is therefore 100,000 x 0.0001 = $10. Hence, we can figure that the profit or loss will be $10 per pip for this forex pair.

If you buy the EUR/USD at 1.16650, and later close your position by selling one lot at 1.16660. The difference between the two is:

    1.16660 – 1.16650 = 0.00010

The difference is 1 pip. You will have made a profit of $10.

Trading pips:

If you opened your position at 1.16650, and you bought one lot. This is similar to buying 100,000 EUR. Notionally, you are selling dollars to purchase Euros. The value of the Dollars that you are selling is naturally dictated by the exchange rate.

For example:

    EUR 100,000 x 1.16650 : USD / EUR = USD 116,650

    You closed your position by selling one lot at 1.16660. Notionally, you are selling the Euros and purchasing the Dollars.

    EUR 100,000 x 1.16660 : USD / EUR = USD 116,660

    That means that you sold $166,650, and ended up with $166,660, for a profit of $10. We can see that a one-pip movement in your favor made you $10.

This trading pips value is fixed across all forex pairs that are quoted to 4 decimal places – a movement of one pip in the exchange rate is worth 10 units of the quote currency if you are dealing in a size of one lot. A movement of 10 pips is worth 100 units of the quote currency. A movement of 100 pips is worth 1,000 units of the quote currency, and so on.

How to count pips in MT4:

( 1.31190/1.31208 ) you can notice that the figures for the last decimal place are smaller than the other numbers. This is to view that these are fractional pips. The contrast between the bid and the offer is 1.8 pips. If you purchased and sold at this quote, the pip cost would be 1.8. 

Note that the Modify Order part of the window includes drop-down menus that permit you to quickly choose levels that are a specific number of ‘points’ away. There is an important contrast to be made between points and pips. The points in these drop-downs are indicating the 5th decimal place, in other words, one-tenth of a pip.

If you choose 50 points here, you will be choosing an order level that is just 5 pips away. A really useful way to familiarise yourself with the pips in forex prices is to test the MT4 using a Demo trading account. This account permits you to show and trade on live market prices but with zero risks, because you are only trading with virtual funds, so your capital is not at risk.

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