DEFINITION of Pip value
The pip value is the price attributed to a one-pip move in a forex trade. It is often used as the reference to the position’s losses or gains.
WHAT IT IS IN ESSENCE
The meaning of pip value can vary between currencies. But as most major currency pairs are priced to four decimal places, a pip is usually equal to the fourth figure after the decimal point.
In GBP/USD, for instance, 0.0001 is one pip.
Because pips are tiny in value, forex is traded in micro lots, mini lots and lots: 1000, 10,000 or 100,000 units of currency.
Although this isn’t that much, through leverage it can represent a significant exposure and can influence your open position considerably.
This price attribute is defined by the currency pair being traded, the size of the trade, and the exchange rate of the currency pair.
To calculate it, divide one pip (usually 0.0001) by the current market value of the forex pair. Then, multiply that figure by your lot size, which is the number of base units that you are trading. This means that the value of a pip will be different between currency pairs, due to the variations in exchange rates. However, when the quote currency is the US dollar, the value of a pip is always the same – if the lot size is 100,000, the pip will equal $10.
Forex broker or provider calculate the value of a pip.
HOW TO USE
In forex trading, this can be a confusing topic. A pip is a unit of measurement for currency movement and is the fourth decimal place in most currency pairs. For example, if the EUR/USD moves from 1.1015 to 1.1016, that’s a one pip movement. Most brokers provide fractional pip pricing. Hence, you’ll also see a fifth decimal place such as 1.10165, where the five represent a half pipe.
Whatever currency the account is when that currency is listed as second in a pair the pip values are fixed.
Not all currency pairs include your account currency. You may have a USD account, but want to trade the EUR/GBP. Here’s how to figure out the pip value for pairs that don’t include your account currency.
The second currency is always fixed if a trader had an account in that currency.
For example, we know that if a trader held a GBP account then the EURGBP pip value is GBP10 for a standard lot. The next step is converting GBP10 to our own currency. If our account is USD, divide GBP10 by the USD/GBP rate. But if the rate is 0.7600, then the pip value is USD$13.16.
Say, a trader can only find a “backward” quote, such as the GBP/USD rate is 1.3152, then divide one by the rate to get 0.7600. That is the USD/GBP rate.