A pip is an acronym for “percentage in point” or “price interest point.” It represents the smallest price movement in the exchange rate of a currency pair. In most cases, a pip is the fourth decimal place in a currency quote (e.g., 0.0001). The only exception is the Japanese yen, where the second decimal place represents a pip. (Investopedia, 2023; TradingSim, 2022)
Key Facts
- Definition of a Pip:
- A pip stands for “percentage in point” or “price interest point” and represents the smallest price movement in the exchange rate of a currency pair.
- Most currency pairs are quoted to four decimal places, and a pip is typically the fourth decimal place (e.g., 0.0001).
- The exception is the Japanese yen, where the second decimal place represents a pip.
- Pip Value Calculation:
- The value of a pip depends on the currency pair, exchange rate, and trade value.
- When the USD is the second currency in the pair (quote currency), such as in the EUR/USD pair, the pip value is fixed at 0.0001.
- For example, if you have a trade value of 10,000 euros in the EUR/USD pair, the pip value would be $1.
- When the USD is the first currency in the pair (base currency), the pip value also considers the exchange rate.
- For example, if the USD/CAD exchange rate is 1.2829 and you have a standard lot size of 100,000, the pip value would be $7.79.
- Pips and Profitability:
- The movement of the exchange rate determines whether a trader makes a profit or loss.
- If a trader buys a currency pair and the value of the base currency increases, they make a profit in pips.
- Conversely, if the value of the base currency decreases, they may experience a loss in pips.
Calculating Pip Value
The value of a pip depends on the currency pair, the exchange rate, and the trade value. When the U.S. dollar (USD) is the second currency in the pair (quote currency), such as in the EUR/USD pair, the pip value is fixed at 0.0001. In this case, the pip value is calculated by multiplying the trade value (or lot size) by 0.0001. (Investopedia, 2023; TradingSim, 2022)
For example, if you have a trade value of 10,000 euros in the EUR/USD pair, the pip value would be $1 (10,000 euros x 0.0001 = $1).
When the USD is the first currency in the pair (base currency), the pip value also considers the exchange rate. To calculate the pip value, divide the size of a pip by the exchange rate and then multiply by the trade value. (Investopedia, 2023; TradingSim, 2022)
For instance, if the USD/CAD exchange rate is 1.2829 and you have a standard lot size of 100,000, the pip value would be $7.79 [(0.0001 / 1.2829) x 100,000 = $7.79].
Pips and Profitability
The movement of the exchange rate determines whether a trader makes a profit or loss. If a trader buys a currency pair and the value of the base currency increases, they make a profit in pips. Conversely, if the value of the base currency decreases, they may experience a loss in pips. (BabyPips, n.d.)
References:
BabyPips. (n.d.). What is a Pip in Forex? Retrieved from https://www.babypips.com/learn/forex/pips-and-pipettes
Investopedia. (2023). What Are Pips in Forex Trading and What Is Their Value? Retrieved from https://www.investopedia.com/terms/p/pip.asp
TradingSim. (2022). Pips in Forex Trading Explained. Retrieved from https://www.tradingsim.com/blog/pips-in-forex-trading
FAQs
What is a pip in forex trading?
A pip is an acronym for “percentage in point” or “price interest point.” It represents the smallest price movement in the exchange rate of a currency pair. In most cases, a pip is the fourth decimal place in a currency quote (e.g., 0.0001).
How is the value of a pip calculated?
The value of a pip depends on the currency pair, the exchange rate, and the trade value. When the U.S. dollar (USD) is the second currency in the pair (quote currency), the pip value is fixed at 0.0001. In this case, the pip value is calculated by multiplying the trade value (or lot size) by 0.0001. When the USD is the first currency in the pair (base currency), the pip value also considers the exchange rate.
What is the difference between a pip and a pipette?
A pipette is a fractional pip, which is one-tenth of a pip. Pipettes are used to measure price movements smaller than one pip.
How do pips relate to profitability in forex trading?
The movement of the exchange rate determines whether a trader makes a profit or loss. If a trader buys a currency pair and the value of the base currency increases, they make a profit in pips. Conversely, if the value of the base currency decreases, they may experience a loss in pips.
How many pips are there in a standard lot?
A standard lot is equal to 100,000 units of the base currency. Therefore, there are 100,000 pips in a standard lot.
How many pips are there in a mini lot?
A mini lot is equal to 10,000 units of the base currency. Therefore, there are 10,000 pips in a mini lot.
How many pips are there in a micro lot?
A micro lot is equal to 1,000 units of the base currency. Therefore, there are 1,000 pips in a micro lot.
What is the average pip movement per day for major currency pairs?
The average pip movement per day for major currency pairs can vary depending on market conditions. However, as a general guideline, the average daily range for major currency pairs is around 100 pips.