What are forex pips? How to calculate pips in forex?
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If you have studied Forex and read articles related to them, you must have come across the phrase ‘pip’ or ‘pips’. So what are pips? This article will learn what pips are, calculate pips in Forex, and their importance in trading.
What are forex pips?
What is a Pip in Forex? The pip is a unit of measurement for the price change of a financial instrument. The value of 1 pip depends on the financial market the trader trades in.
In the past, the pip was considered the smallest change in the forex rate, but this is no longer the case as many more accurate pricing methods are available today.
Usually, Forex currency pair prices are represented by four decimal places, and one forex pip is in the last decimal place.
However, many stock exchanges now add an extra decimal point after the Forex rate. This means that one pip in Forex is no longer located to the last decimal place but is moved to the fourth decimal place in most currency pairs.
The standardized one pip value is identical across all exchanges and trading platforms. As a result, traders all over the world understand how they need to trade accordingly.
* See more: The complete guide XM from a to z
How to calculate pips in Forex? How much is one pip?
To better understand “what is a pip,” we need to learn how to calculate pips in Forex. One pip is at the 4th decimal place in the Forex rate for most currency pairs, with only a few typical exceptions, such as the Japanese yen. For Forex currency pairs involving the Japanese yen (JPY), one pip is in the 2nd decimal place. Here is an illustration of 1 pip in common currency pairs.
How much is one pip in USD?
The value of a pip is related to the contract size (trade size). Let’s say we buy one lot of the EUR/USD currency pair. Then, to calculate how much USD is one pip, we multiply the contract size by one forex pip:
- 1 lot = 100,000 EUR
- 1 Forex Pip = 0.0001 EUR/USD
- The value of 1 pip for 1 trading lot is: 100,000 * 0.0001 = 10 USD
In the above example, we already know how to calculate the value of 1 pip in USD, but how to know how much one pip in Forex?
How to calculate one pip forex?
Suppose we buy one lot of EUR/USD at 1.16650 and then sell them at 1.16660. Then, the difference between the buying and selling prices will be: 1.16660 – 1.16650 = 0.00010
As said earlier, one forex pip is at the 4th decimal place after the comma. Therefore, one pip of Forex in this example is equal to 0.00010, and the value of 1 pip is equal to 10 USD. We sell the pair when the price increases, so we will make a profit of 10 USD.
With examples, it is easy for traders to understand what one pip in Forex is. The table below will show traders the value of 1 pip in popular currency pairs.
How to calculate pips in Forex?
Let’s say we buy 1 EUR/USD contract at 1.16650. One contract is equivalent to 100,000 EUR. Usually, we will sell USD to buy EUR. Therefore, the USD value that we are selling will be converted to the exchange rate.
- To buy 100,000 EUR, we need to sell : 100,000 x 1.6650 : USD/EUR = 116,650 USD
- We close the position by selling one contract for 1.16660 – equivalent to selling Euros to buy Dollars.
- When we sell 100,000 EUR, we get: 100,000 x 1.16660 : USD/EUR = 116,660 USD
- Thus, we initially sold out of 116,650 USD, then rebought 116,660 USD, equivalent to 10 USD profit. From there, we see that one pip of Forex is worth 10 USD.
If you still don’t understand “What are Pips in forex,” traders don’t worry. The term is a bit confusing at first, so that’s completely normal. Currency pairs quoted to the 4th decimal have the same value of 1 pip.
If we trade one lot (100,000 base currency – or first currency in the currency pair), then one forex pip will be worth ten units of the quote currency (2nd currency in the currency pair).
Ten pips forex will equal 100 units of quote currency, and 100 pips will equal 1,000 units of quote currency…
How to calculate forex pips with currency pairs with an exchange rate other than four decimals?
The most notable currency pair with an exchange rate other than four decimals is the Japanese Yen. These currency pairs usually have only two decimal places, and the pip value is in the 2nd decimal place.
Now, we will learn together how to calculate pips in Forex with USD/JPY pair: If you sell one lot of USD/JPY, then when the price drops by one pip, the trader will earn 1,000 yen.
Let’s see the example below to understand this issue better:
How to calculate one pip value with USD/JPY
- We sell 2 lots of USD/JPY at 113,607. 1 lot USD/JPY is 100,000 USD. Thus, we are selling 2 x 100,000 USD = 200,000 USD to buy: 2 x 100,000 x 113,607 = 22,721,400 JPY.
- The price of the currency pair moves in the opposite direction, and we decide to stop loss. We close our trading position at 114.107. One pip forex USD/JPY is at the 2nd decimal place. Thus, the price has gone against the trend: 114.107 – 113.607 = 0.50 equivalent to 50 pips.
- Trader closes the position by buying 2 lots of USD/JPY at 114.107. To buy back 200,000 USD at this rate, the trader loses: 2 x 100,000 x 114,107 = 22,821,400 JPY.
- Thus, to buy back 200,000 USD, the trader loses 100,000 JPY more than the initial dollar sale, which means that the trader has lost 100,000 JPY.
Loss of 100,000 JPY for 50 pips is equivalent to each pip, trader loses: 100,000/50 = 2,000 JPY. Since the trader sells two lots, the value of 1 pip for each traded lot is 1,000 JPY
After today’s article, we hope traders understand what pips are, what pips in Forex, how to calculate pips in Forex.
Understanding the term pips, pip forex is the first step to becoming a professional forex trader. At that time, the trader can calculate the profit or loss that he achieved.