What Are Pips and How Do They Affect Forex Trading?

WHAT ARE PIPS IN FOREX TRADING?

In forex trading, a PIP, which stands for Point in Percentage, is used to measure the smallest change in value between two currencies. It is represented by a change of one digit in the fourth decimal place of a typical forex quote.

For instance, if the EUR/USD currency pair's price changes from 1.1402 to 1.1403, it would be considered a movement of one pip or point.

Example of a pip using the quote to buy EUR/USD

Not all forex quotes are displayed in the same way, with the Japanese Yen being a notable exception. To learn more about how pips are used in forex trading, including examples from selected major currency pairs, continue reading.

HOW TO MEASURE THE PIP VALUE IN FOREX TRADING?

The value of a pip is determined by multiplying one pip (0.0001) by the specific lot or contract size. For standard lots, this means 100,000 units of the base currency, and for mini lots, it means 10,000 units. For example, in the case of EUR/USD, a one pip movement in a standard contract would be equal to $10 (0.0001 x 100,000).

Calculating the value of a single pip allows forex traders to assign a monetary value to their take profit targets and stop loss levels. Instead of just analyzing movements in pips, traders can determine how the value of their trading account (equity) will change as the currency market moves.

It is important to note that the value of one pip will vary for different currency pairs. This is because the value of one pip is always shown in the currency of the quote or variable currency, which will differ when trading different currency pairs. For example, when trading EUR/USD, the value of one pip will be displayed in USD, while when trading GBP/JPY, it will be displayed in JPY.

HOW TO DETERMINE THE PIP VALUE FOR ONE PIP - USING EUR/USD PIPS AS AN EXAMPLE.

Since each currency has its own relative value, it is necessary to calculate the value of a pip for each specific currency pair.

It is important to remember that forex trading involves set amounts of currency that can be traded. Most brokers offer both a standard and a mini contract, with the specifications outlined in the table below.

TYPE OF CONTRACT	CONTRACT SIZE (NO. OF UNITS OF THE BASE CURRENCY)
Standard Lot	100 000
Mini Lot	10 000

The value of a one pip for the EUR?USD standard contract is calculated as follows:

Pip Value = Contract size x One Pip

Pip Value = 100,000 x 0.0001

Pip Value = $10

In forex trading, every one pip movement in your favor results in a $10 profit, while every one pip movement against you results in a $10 loss. Similarly, a one pip movement in a mini contract results in a $1 profit or loss (10,000 x 0.0001).

To better understand pips and how to calculate their value, you may want to practice doing some calculations on your own.

PIP VALUE CONVERSIONS

If your account is based in Great British Pounds (GBP), you would need to convert the value of a pip for a 10k EUR/USD lot, which is $1, into Pounds. To do this, simply divide $1 by the current GBP/USD exchange rate, which at the time of writing is 1.2863. Since a Pound is worth more than a US dollar, the result should be less than 1. Dividing 1 by 1.2863 gives us 0.7774 Pounds. So, if you have a Pound-based account and profit or lose one pip on one 10k lot of EUR/USD, you will earn or lose 0.7774 Pounds.

THE UNIQUE SITUATION - PIPS IN USD/JPY

When trading major currencies against the Japanese Yen, it is important to note that a pip is no longer represented by the fourth decimal place, but rather by the second decimal place. This is because the value of the Japanese Yen is much lower than that of the major currencies.

For example, looking at the USD/JPY quote below, the ask (buy) price is 107.99 Yen for 1 USD.

When trading mini contracts (10k) and standard contracts (100k) in Japanese Yen, the value of one pip will be JPY 100 and JPY 1,000, respectively.

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