A pip, which is short for point in percentage, is a unit of measurement to show the movement of the price between two currencies.
Pip is a standardised unit of measurement in the Forex markets. It measures the smallest price change for a currency quote.
Pips allow a trader to calculate gains and losses. Their actual value a pip represents will depend on the order placed by a trader.
How Do Pips Work?
Most currency pairs are displayed by four decimal points. It’s the last decimal point that is measured as a pip.
A movement in the last decimal point of a quotation by one digit would be one pip.
If GBP/USD moves from 1.3060 to 1.3061, that .0001 USD rise in value is one pip.
Some Forex brokers display five decimal points, the fifth decimal point represents 0.1 pips and is refereed to as a pipette .
Japanese pairs are an exception to this rule and only display 2 decimal points.
The second decimal point would show the pip movement, with the third decimal point being a pipette.
If USD/JPY moves from 109.63 to 109.64, that .01 USD rise in value is one pip.
How To Calculate A Pip’s Value
To calculate the value of a pip by hand, you can use the following formula:
Pip Value = (Pip in decimal places * Trade Size) / Market Price
Trading 1 lot of EUR/USD with an account denominated in EUR, the calculation would be as follows:
- One pip in decimals = 0.0001, Trade Size = 100,000, Exchange Rate = 1.13695
- 0.0001 * 100,000 = 10
- 10 / 1.13695 = 8.79546
So one pip in this case would be equivalent to 8.79546 USD.
There are also many online calculators that will automatically calculate the value of a pip to save you some time.
This calculator from Myfxbook is popular with traders.