What is a Pip and What is Pipette in Forex Trading?

Spread the love
  • 10
    Shares

Forex Pips and Pipette explained

Discussion Topic: Forex Pip & Pipette


You’ve most probably heard the terms "forex pip", "pips" and "pipettes" flowing around the internet & in forex trading forums. And you probably asked yourself that what are they? Today we are going to explain what is a pip in forex trading? What is pipette? the value of 1 pip in forex? and how to calculate pips in forex trading?

Take your time to understand this chapter, as this is the most basic knowledge every trader should have. Don't even imagine about trading until you're comfortable with forex pip & pipette, and calculating profit/loss from forex pip.

Some Basics About Types of Forex Broker: 


Before going deep into pips and pipettes, let me tell you that, to identify the forex pip and pipette you first need to identify the broker type you are registered to.

4 Digit Broker - These are traditional brokers, those who display the currency exchange values up to 4 decimal places (except YEN or JPY Pairs), Like EUR/USD=1.2354 or AUD/USD=0.7853 etc. And for JPY Pairs (YEN Pairs) they display up to 2 decimal places, like USD/JPY=113.12 or GBP/JPY=151.61.

5 Digit Broker - In recent days some brokers start to display the currency exchange values up to 5 decimal places (except YEN or JPY Pairs), Like EUR/USD=1.23542 or AUD/USD=0.78539 etc. And for JPY Pairs (YEN Pairs) they display up to 3 decimal places, like USD/JPY=113.121 or GBP/JPY=151.613.

What is a Pip in Forex Trading? 


Everything in this world needs a define measures for calculating their values, so does forex. The "Pip" is the unit of measurement to express the change in exchange value between two currencies.

The term “pip” is an acronym for "percentage in point", also known as price interest point. If you already trading stocks then you may think this as an equivalent to 1 basis point.

In case of a 4 digit forex broker, a pip is normally the last decimal place of a quotation. And for 5 Digit forex broker, it is usually the second-last digit in the quotation.

The pictures that are shown below explain what are pips in forex trading:

What is a Pip in Forex Trading

OR

Pips in forex trading 5 digit broker

To explain what is 1 pip in forex, let's say we are dealing with EUR/USD pairs and USD/JPY pairs.

So For 4 digit forex brokers, if EUR/USD moves from 1.1805 to 1.1806 (or to 1.1804), that 0.0001 USD movement in either way is called ONE PIP (1 pip). For USD/JPY if the value moves from 110.21 to 110.22 (or to 110.20) that 0.01 YEN movement is called ONE PIP (1 pip).

Alternatively, For 5 digit forex brokers, If EUR/USD moves from 1.18050 to 1.18060 (or to 1.18040), that 0.00010 USD movement in either way is called ONE PIP (1 pip). For USD/JPY if the value moves from 110.210 to 110.220 (or to 110.200) that 0.010 YEN movement is called ONE PIP (1 pip).

Counting the total Pips in forex price movement, is the most standard way to calculate the profit and loss incurred on a trade.

For example, if you enter a long position (Buy) on EUR/USD at 1.2750 and it moves to 1.2800 by the time you close your position you have made a 50 pip profit. Likewise, if you enter a short position (Sell) at 1.2750 and the price moves up to 1.2800 you lose 50 pips.

What is Pipette in Forex Trading? 


Since the last couple of years, many brokers started to display exchange rates in 5 decimal digits. In such cases, the last digit of the exchange rate is called a “Pipette”.

Pipette in Forex Trading

So, a pipette in forex is simply the one-tenth value of a forex pip. It is only applicable for 5 digit brokers, and pipette appears as either the fifth decimal digit (except JPY pairs) or the third decimal place (JPY pairs) in currency pair exchange rates.

[See Also: Exchange Rate, Base Currency, and Quote Currency

For example, For instance, if EUR/USD moves from 1.20685 to 1.20686 (or to 1.20684), that .00001 USD movement in either way is called ONE PIPETTE.

Do not worry, if your broker displays exchange rates in pipettes! You just have to ignore the pipette when you are calculating profit/loss, as the pipette is not a well-recognized standard for calculation and don’t have much effect on your calculation unless you are dealing with huge lot sizes.

[See Also: How the Lot size affects your trade’s profit/loss].

How to Calculate Pips in Forex Trading?


As forex is always traded in pairs, so every currency has its own relative value against another currency. Hence the value of pip changes depending upon the pair you trade.

Calculating the total pips and the value of a pip is not crucial to your success, as your broker will automatically figure out the value for you.

However, if you become an advanced trader and want to calculate the profit/loss before placing the actual trade, then the below calculations would be helpful for you.

** In below examples, for ease of calculation we would take exchange rates up to 4 decimal places **

The total count of pips in a forex trade in done by subtracting the initial bid price from the trade closing price.

[See Also: What is Bid-Ask Spread in Forex Trading]

So the Formula to calculate pips in forex trading is as follows:

Total Pips movement = Trade Closing Price - Initial Bid Price

For example, if you have placed an order for buying EUR/USD at 1.2300 and after few hours you closed the trade at a price of 1.2350, then the total pips movement will be 1.2350 - 1.2300 = 50 pips.

Similerly, if yo have placed an short order of GBP/USD at 1.31205 and after few hours you closed the trade at a price of 1.30502, then the total pips movement in this forex trade will be 1.3120 - 1.3050 = 70 pips. [look!! we are ignoring the pipette at time of calculating pips in forex trading]

How to Calculate the Value of 1 Pip in Forex Trading? 


Calculating the value of 1 pip for base currency is very easy using this simple pip value formula:

Value per pip = numeric value of 1 pip / exchange rate 

Now let’s look at some examples of calculating the value of 1 pip in forex trading.

Trade1:

USD/CAD = 1.0623 [Here USD is base currency]
0.0001 / 1.0623 = 0.00009414 (approx)
1 PIP = 0.00009414 USD (approx)

Trade2:

USD/JPY = 109.23 [Here USD is base currency]
0.01 / 109.23 = 0.0000915 (approx)
1 PIP = 0.0000915 USD

Trade3:

GBP/JPY = 122.54 [Here GBP is base currency]
0.01 / 122.54 = 0.0000816 (approx)
1 PIP = 0.0000816 GBP

I know that the value of 1 pip is looking so tiny!!! But don’t lose interest. Think if you have a position of 10,000 Units (1 mini lot) of the base currency. So now:

For Trade1, your total pip value would be 0.00009414 * 10000 = 0.9414 USD.

For Trade2 your total pip value would be 0.0000915 * 10000 = 0.915 USD.

For Trade 3 your total pip value would be 0.0000816 * 10000 = 0.816 GBP.

Now if you use the leverage of 1-to-100!!! Then?

For Trade1 your total pip value would be 94.14 USD.

For Trade2 your total pip value would be 91.5 USD.

For Trade 3 your total pip value would be 81.6 GBP.

[See Also: What is Forex Leverage and Margin? How They Affect your Trades?]

Converting the Pip Value in your Currency: 


Now we know how to calculate pip value of the base currency. But now the problem is that, as being global, it’s not always possible that would have your account set up in the denomination of the base currency you are trading.

So the question arises that “how would I convert the pip value in my own currency?”

Here is a simple solution to this problem, the formula is to just multiply the “found pip value” by the exchange rate of your own account currency and the currency in question.

Let’s check out the conversion of Trade3 to USD using this formula

The trade 3 was:

GBP/JPY = 122.54 [Here GBP is base currency]
0.01 / 122.54 = 0.0000816 (approx)
1 PIP = 0.0000816 GBP

Now to convert your pip value to USD you just need to multiply the value of GBP/USD. Assuming that GBP/USD=1.5239

Then the pip value in USD would be

0.0000816 * 1.5239 = 0.0001243 USD
1 pip = 0.0001243 USD

So for every pip movement in GBP/JPY pair, there would be a movement of 0.0001243 USD.

 

We hope that you have enjoyed the above article explaining the forex pip and pipette. Be with us to explore forex trading, stocks trading, and other money-making opportunities.

Leave us some comments if you have any questions or doubts related to pip in forex trading or how the value of a pip is calculated?

If you like our articles then please like our facebook and twitter page for receiving latest updates.


Spread the love
  • 10
    Shares
Posted in Forex Trading Guide and tagged , , , .

I'm an MBA Professional and just want to share my knowledge & experience about online earning opportunities. I have 8+ Yrs of experience in Forex/Stock Trading & 10+ Yrs in online home-based earning.
I wish you all the best !!! Happy Earning !!!!

Leave a Reply

1 Comment on "What is a Pip and What is Pipette in Forex Trading?"

avatar
  Subscribe  
newest oldest most voted
Notify of
R.R.
Guest

The moral problem of speculation
[link removed]