Pip stands for percentage in point. It’s a basic concept of forex trading and reflects the smallest price movement between the buy and ask price of two currencies. Traders and investors use the term pip to describe the bid-ask spread between the bid and ask prices of the currency pair and indicate how much money they have made or lost on a trade.
Forex traders buy and sell a currency based on its relationship to another currency (EUR/USD). Most currency pairs are priced at four decimal places and the pip is the last (4th) decimal point. Only the Japanese Yen goes to two decimal points.
The fifth decimal place is what traders call a pipette. It’s equal to one-tenth of a pip.
Pips and spreads
The spread is the difference in pips between the bid price (what the seller receives) and the asking price (what the buyer pays). Forex brokers keep the spread. That’s how they make money.
The bid-ask spread is the difference between the highest price a buyer is willing to pay for a currency in a pair and the lowest price a seller is willing to accept for a currency. If you are selling, you receive the bid price. If you are buying, you receive the asking price.
Example
If the buyer buys at 0.8524 (bid price) and the seller sells at is 0.8520 (ask price), the spread the broker takes is 3 pips.
How much is a pip?
A pip is equal to 1/100 of 1% or one basis point.
Therefore, the smallest price move the EUR/USD currency pair can make is $0.0001 or one basis point.
Think of pip as being the smallest part of the price unit of a currency pair just like a pip is the smallest part of a fruit. Forex traders talk about gains and losses in terms of the number of pips their position rose or fell.
Example
| EUR/USD moves from 1.1815 to 1.1814 | Increase of 1 pip |
| EUR/USD moves from 1.1815 to 1.1825 | Increase of 10 pips |
| EUR/USD moves from 1.1815 to 1.1805 | Decrease of 10 pips |
How much money you make or lose on each price movement depends on the size of the position you open. Large positions mean each pip movement in the currency pair has a greater financial consequence to your balance.
The calculation is quite simple.
You multiply the trade/position size by 0.0001 (1 pip).
Example
For a position size of 10 000 units (micro lot):
10 000 * 0.0001 (1 pip) = $1 per pip
Every time the currency pair moves 0.0001 (1 pip), you make a profit or loss of $1, depending on which way the price moves. You gain or lose $1 for every pip movement in either direction.
If the EUR/USD moves 100 pips (1 cent) in a positive direction, you make a $100 profit.
If it moves 100 pips in a negative direction, you make a $100 loss.
More examples
5 000 units * 0.0001 (1 pip) = $0.50 per pip
100 000 units * 0.0001 = $10 per pip
150 000 units * 0.0001 = $15 per pip
How is the pip value measured?
The pip value is always measured in the currency of the quote currency of the forex pair.
The quote currency is the right-hand side of the pair.
Example
EUR/USD = 1.2100 usd
- EUR (Euro) is the base currency
- USD (United States Dollar) is the quote currency
The pip value is USD.
More examples
| USD/YEN | Pip value in Japanese Yen | 10 000 units * 0.0001 = ¥ 1.00 pip |
| EUR/GBP | Pip value in Pound Sterling | 10 000 units * 0.0001 = £ 1.00 pip |
| AUS/ZAR | Pip value in South African Rand | 10 000 units * 0.0001 = R 1.00 pip |
How to calculate the pip value on a trade lot
To calculate the pip value:
Divide 1 pip (usually 0.0001) by the current value of the currency pair.
Then, multiply that figure by your trade size (number of base units).
| Currency pair | Exchange rate | Trade size | One pip equals |
| GBP/USD | 1.5000 | Micro lot = 10 000 | (0.0001/1.5000) * 1 000 units = 0.0666 |
| GBP/USD | 1.5000 | Mini lot = 10 000 | (0.0001/1.5000) * 10 000 units = 0.6666 |
| GBP/USD | 1.5000 | Lot = 100 000 | (0.0001/1.5000) * 100 000 units = 6.66 |
For every pip movement, you will make or lose:
- micro lot = $ 0.0666
- mini lot = $ 0.6666
- lot = $6.66
How to work out how much money you’ve made or lost on a trade
If you make a profit of 20 pips on a position, how much money will you make if you opened a trade position of $250 000 on the United States Dollar (USD) and Canadian Dollar (CAD) currency pair and the position closed at USDCAD 1.2698?
- Determine the number of the quote currency (CAD) per pip
| Trade position | Exchange rate | Pip change | Â |
| $250 000 | USD/CAD 1.2698 cad | +20 pips | 250 000 * 0.0001 = 25 CAD per pip |
- Calculate the number of base currency (USD) per pip
| Trade position | Exchange rate | Pip change | Â |
| $250 000 | USD/CAD 1.2698 cad | +20 pips | 250 000 * 0.0001 = 25 CAD per pip 25 ÷ 1.2698 = 19.69 USD per pip |
- Determine the total profit or loss of the trade
| Trade position | Exchange rate | Pip change | Â |
| $250 000 | USD/CAD 1.2698 cad | +20 pips | 250 000 * 0.0001 = 25 CAD per pip 25 ÷ 1.2698 = 19.69 USD per pip 20 (pips gained) x 19.69 = $ 393.80 USD profit |
TRY THE PIP QUIZ
| US$ 250 000 trade for EUR/GBP pair closed at 0.8772 after gaining 15 pips | |
Number of GBP per pip Per pip value Trade profit or loss | 250 000 * 0.0001 = 25 GBP per pip 25 ÷ 0.8772 = 21.93 EUR per pip 15 pips × 21.93 = 328.95 EUR profit |
| US$ 180 000 trade for AUD/NZD pair closed at 1.0680 after losing 20 pips | |
Number of NZD per pip Per pip value Trade profit or loss | 180 000 × 0.0001 = 18 NZD per pip 18 ÷ 1.0680 = 16.85 AUD per pip 20 pips × 16.85 = 337.00 AUD loss |
| R100 000 trade for EUR/GBP pair closed at 0.8772 after gaining 10 pips | |
Number of GBP per pip Trade profit or loss | 100 000 × 0.0001 = 10 GBP per pip 10 ÷ 0.8772 = 11.40 CHF per pip 10 pips × 11.40 = 114.00 CHF profit |
IN SUMMARY
Lucky for us, the fancy electronic trading platforms we use these days for forex trading work out the pips, pipettes and spreads for us. All we need to worry about is the bottom line… did we make a profit or a loss.
However, the more you know about the complex workings of forex trading, the better. Forex is a heavy leverage instrument and you can lose a lot of money even on a one pip difference.
FOREX TRADING AFRICA DISCLAIMER
Forex trading is associated with a high degree of risk because the instrument is highly leveraged and the market can be extremely volatile. You should never trade financial instruments with money you cannot afford to lose. The information in this article is for educational purposes only and in no way a solicitation of any order to buy or sell assets.
Featured Writer on SA Shares, Forexsuggest and Forextrading.africa
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