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What is a pip in Forex?
If you're looking to get started in Forex trading you'll hear the word pip used a lot, but what does it mean?
Put simply, a pip, or price interest point, is a measure for the change in price between two currency pairs. It represents the smallest change in a currency quote and is measured to the final decimal place. For most currencies, such as the GBP, this is measured to the 4th decimal place, or 1/100th of 1%, also known as 1 basis point. There are some exceptions to this rule however, such as Japanese Yen pairings which are measured to the 2nd decimal place. Being able use such a precise measure for trades is beneficial for Forex brokers as, if 10 basis points represented a pip, then the market would be extremely volatile.
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Pipettes
Whether you trade in pips or pipettes will depend on which measure your broker quotes, with some leaving the choice open to you. A pipette is essentially the same as a pip but instead of being measured to 4 decimal places, or 2 in the case of the Japanese Yen pairing, they are measured to 5 decimal places or 3. These are less commonly used than pips but some find the spreads easier to read when they are in the form of pipettes. Just remember that the number of pipettes a currency has moved will be 10x higher than compared to pips.
Determining the value of a pip
The easiest way to understand how calculating the value of a pip works is to use an example:
Lets say that we have an EUR/GBP direct quote of 0.8838. This means that for every €1 euro you have you will get £0.8838 pounds in return. If we then see a one-pip increase in this quote to 0.8839, the value of the euro would rise relative to the pound, as €1 euro would allow you to buy slightly more pounds.
Now, in this example we are looking to buy £10,000 pounds with our euros, the price paid will be €11,314.78 euros ([1/0.8838] x 10,000). If we then see a one-pip increase in this currency pair, the price paid would be €11,313.50 euros ([1/0.8839] x 10,000). In this example the pip value on our £10,000 pounds will be €1.28 euros (€11,314.78 – €11,313.50). If we had bought £100,000 in the beginning, the pip value would become €12.8 euros. You can then multiply your pip value by the amount of pips the currency pair has moved to see whether you have made a profit or a loss. Your pip value will change based off the amount of underlying currency (Pounds) purchased.
If all this maths is making you anxious, don’t worry! Nearly all brokers will work this out automatically, this is just to show how it all works.
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