Understand Forex Pips to Boost Your Trading Strategy

3 min read

Two Different Approaches to Profitable Forex Trading 3
The pips, short for ”percentage in point” or ”price interest point”, is the smallest fractional price move in the exchange market. When a price change on the exchange it is referred to as a Pip or Pipette change.
Pip is a standard unit for measuring how much an exchange rate has changed in value.
As most currency pairs are priced to 4 decimals places ($0.0001) the smallest change would be to the last number after the decimal point.

The most notable exceptions are those FX pairs involving the Japanese Yen. For pairs involving the JPY, 1 pip is a movement in the second decimal place.

Originally, a pip was effectively the smallest increment in which an FX price would move. Though, with the advent of more explicit systems of pricing, this original definition is no longer valid.
Traditionally, FX prices were quoted to a set number of decimal places. Most commonly, it was four decimal places. And, basically, a pip was a one-point movement in the final decimal place quoted.
Traders frequently use pips to footnote gains or losses. A pip estimates the amount of change in the exchange rate for a currency pair. You can calculate it by using the last decimal point.
Since most major currency pairs are priced to 4 decimal places, the smallest change is that of the last decimal point which is equivalent to 1/100 of 1%, or one basis point.
When a trader to says that made 30 pips on the trade, for instance, that means the trader profited by 30 pips. The actual cash amount this represents depends on the pip value.
For example, if the price of EUR/USD moves from 1.1371 to 1.1372 this would be a one pip or ‘point’ movement.
A pip is equivalent to a change of 1 point in fourth decimal in the exchange rate of the currency pair.

How to calculate the pips value?

1. Start with 10,000.  Multiply 10,000 by .0001 since 1/10,000th is a pip for all pairs (except JPY pairs).
10,000 x .0001 = 1
2. You now know each pip is worth 1 USD. That will be valued in the “counter currency” or second currency of the pair.
3.  In this example, we are using the EUR/USD, so USD is the counter currency of the pair. Here, 1 pip is worth 1 USD dollar for 1 – 10k lot of EUR/USD.

A short note about what is a lot in Forex?
In the past, spot forex was only traded in specific amounts called lots, or basically the number of currency units you will buy or sell.
The standard size for a lot is 100,000 units of currency, and now, there are also mini micro, and nano lot sizes that are 10,000, 1,000, and 100 units.

Here is how to calculate Pip value when your base currency is not the same as the second currency in the pair.

The example below shows how you can calculate the value of 1 Pip for 1 – 10K lot of EUR/GBP where the base currency of the account is USD.

  1. Start with 10,000. Multiple 10,000 by .0001 since 1/10,000th is a pip for all pairs (except JPY pairs). 10,000* .0001 = “1”.
  2. You now know each pip is worth “1”. That will be valued in the “counter currency” (second currency) of the pair.  In this example, we are using the EUR/GBP, so GBP is the counter currency of the pair.
  3. Take the current exchange rate of the GBP/USD and multiply it by “1” to calculate the value of 1 pip in your base currency.
  4. For example, GBP/USD is trading at $1.32 and 1 Pip for EUR/GBP would be equal to $1.32 USD.

Value of pips

The value of the pips for your trade can differ depending on your trading lot size.
The difference in pips between the bid and ask is called the spread. The spread is essentially how your broker makes money because most Forex brokers don’t take the official commission.
When your trade is positive in pips, you are making a profit. But, when it’s negative, you are losing money.
Some Forex brokers also provide trades to grow in fractional pips. Fractional pips accept for even tighter control on profits and losses and offer adaptability on spreads.

Major currencies pips

Pip values vary per currency as they are dependent on how the currency is traded. On some trading platforms even though rare, it is possible to record a price move in half-pip increments. Therefore the value of one pip is generally a standard on most interfaces. However, it depends on the trading platform.
There are systems that show 4 digits (pips) and those that show 5 (pipettes).
The major currencies are the Japanese Yen (JPY), Great British Pound (GBP), US Dollar (USD), Euro (EUR) and the Canadian Dollar (CAD). These major currencies can be paired with each other or some exotic currencies.
It is important to keep up-to-date of forex daily average ranges when trading, in order to estimate volatility in the Forex Market. Should the pairs not meet estimated ranges then you will not be hitting your profits. So you have to set up lower targets.

Do pips value have relevance when hedging

Many traders believe that there is no risk position because they are hedged. Hedging is a risk-taking position because a widening spread picks into both positions. When a dynamic event happens, the difference between the bid and ask can widen by more than 100 pips in usually liquid pairs. If a trader is hedging a pair that’s not liquid, the spread can be even more aggressive. And can result in a large loss to a hedged trader.

What about currencies that are not quoted to 4 decimal places?

The most well-known currency is the Japanese Yen. Currency pairs involving the yen were traditionally quoted to two decimal places. FX pips for such pairs are therefore governed by the second decimal place. So how to calculate pips with the USD/JPY currency pair: If you sell one lot of the USD/JPY, a downward movement of one FX pip in the price will enable you to earn 1,000 yen.

The bottom line

We hope you have the answer to the question of ‘what a pip is in Forex trading’. Being familiar with the unit of measurement for changes in FX valuations is a crucial first step.

Before you finish this post, try to answer these 3 simple questions and check your new knowledge. But be honest and try not to look for the answers below.

  1. A $350,000 trade involving the EUR/GDP pair is closed at 0.8714 after gaining 29 pips.
  2. A $175,000 trade involving the AUD/NZD pair is closed at 1.2703 after losing 17 pips.
  3. Currency Pair: CHF/JPY, Exchange Rate at Close: 83.84, Pip Change: +18, Trade Amount: 500,000 CHF
  4. Currency Pair: USD/JPY, Exchange Rate at Close: 91.16, Pip Change: -27, Trade Amount: 200,000 USD

The answers:

1Number of GBP per pip: 350,000 × 0.0001 = 35
Per Pip Value: 35 ÷ 0.8714 = 40.17 EUR per pip
Trade Profit / (Loss): 29 pips × 40.17 = 1, 164.93 Euros
2. Number of NZD per pip: 175,000 × 0.0001 = 17.5
Per Pip Value: 17.5 ÷ 1.2703 = 13.78 AUD per pip
Trade Profit / (Loss): (17) pips × 13.78 = (-234.26) Australian Dollars
3. Number of JPY per pip: 500,000 × 0.01 = 5,000 (Remember, Yen-based currency pairs are an exception and are displayed to only two decimal places)
Per Pip Value: 5,000 ÷ 83.84 = 59.64 CHF per pip
Trade Profit / (Loss): 18 pips × 59.64 = 1,073.52 Swiss Francs
4. Number of JPY per pip: 200,000 × 0.01 = 2,000
Per Pip Value: 2,000 ÷ 91.16 = 21.94 USD per pip
Trade Profit / (Loss): (27) pips × 21.94 = (-592.38) U.S. Dollars

Waste your time. Not your money.

risk disclosure

What's your reaction?
Happy0
Lol0
Wow0
Wtf0
Sad0
Angry0
Rip0
Leave a Comment