When it comes to forex, even if you aren’t too familiar with it, there’s a good chance that you have heard the term “pip”. There are those who are not even too familiar with the basics that have heard the term before, the same way that they may have heard certain terminology regarding markets such as “shares”, “float”, and other terms that are widely used.
“Pips”, “pipettes”, and “lots” are used as quantities in forex, and these are terms that are necessary to know before someone wants to dive into the world of trading.
A pip is a way to designate the last decimal in a quotation, to indicate a change in value. There are some pairs that go to 4 decimal places, but others don’t. This depends on the currency involved.
There are FRACTIONS of a pip, and these are called pipettes (or points). This comes into play when the decimal places are extended to include fractions of a pip.
Here is an example, if EUR/USD moves from 1.06 to 1.061, that would be a “pip”.
If EUR/USD moved from 1.0600 to 1.0601, that would be a “pipette (or point)”.
Each “pip” and “pipette” has Its own value, since it is applied to different currencies, but it is important to know and understand the term.
Pip Value in forex trading:
Of course, no matter what name or term you give something, you want to fully understand the value that you are talking about. Here is how you find the value of a pip.
(Counter currency value change) times the exchange ratio = pip value (in your account base currency)
Let’s give you an example: [(.0002 CAD) / (1.0300 CAD)] x 2 USD = 0.0003883 USD per unit traded.
Using this example, if we traded 20,000 units of USD/CAD, then a one pip change to the exchange rate would be approximately a 3,8 USD change in the position value (20,000 units x 0.0003883 USD/unit).
We say “approximately” because as the exchange rate changes, so does the value of each pip move.
Finding the Pip Value In Your Account Denomination:
You will want to know exactly what a pip value is when you start trading extensively, so that you have the most accurate information possible. The forex market is global, and traders will want to know the exact value of a pip to help determine their profits (or losses).
This is extremely easy to deduce: multiply or divide the “found pip value” by the exchange rate of your account currency and the currency that is involved.
The truth is that nearly all forex brokers will work this out for you immediately, but of course, it never hurts to know how to do this manually, and helps you understand the concepts in a more advanced manner.
If the currency you are converting to is the counter currency of the exchange rate, all you have to do is divide the “found pip value” by the corresponding exchange rate ratio: