What is a PIP

A pip is a common term that is used in the forex market. It refers to the smallest movement (not considering fractional pips) that a currency exchange rate can make. For example, if the GBP/USD exchange rate changed from 1.6014 to 1.6016, you could say that it increased by 2 pips. A pip refers to the fourth decimal point out, or 1/100th of 1%.

Most currency pair exchange rates are priced to the fourth decimal place, frequently making the fourth decimal place represent the pip value. However, for currency pairs like the USD/JPY, which are only priced to the second decimal place, the pip value is not the fourth decimal place but instead the second. So a two pip increase could be represented by a change of 81.79 to 85.81.

Calculating price changes in pips helps you determine transaction costs, profit and loss on trades, among other things. Calculating the exact value of each pip for the currency pair and lot size traded is the job of the trading platform, which includes a pip calculator created expressly for this purpose. It is also good to know the exact calculation required if it is not available.

Value Per Pip = [Lot Size] x [Number of Lots] x [Pip Size]

Dollar pip value for 1 standard lot of EUR/USD, 100,000 [Lot Size] x 1 [Number of Lots] x 0.0001 [Pip Size] = $ 10/pip (quote currency already in U.S. dollars)

The result of this equation will be denominated in the quote currency (the second currency in the pair). No currency conversion is needed for U.S. dollar – denominated trading accounts if the quote currency is already USD. To obtain the dollar value per pip if the quote currency is anything other than USD, however, the result must be converted to dollars using the current exchange rate between the quote currency and the U.S. dollar.

Pip value for 1 standard lot of USD/JPY = 100,000 [Lot Size] x 1 [Number of Lots] x 000.01 [Pip Size] = ¥ 1000 (quote currency in Japanese yen)

Dollar pip value = ¥ 1000 ÷ ~82.84 [current USD/JPY exchange rate] = ~$12.07/pip

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