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Friday, July 12, 2024

What Is PIP In Forex Trading?

An equally important aspect of Forex trading as we need to cover in our beginners guide to Forex trading is ‘PIPs’.

Among other Forex trading terms, Pips is one important element of every Forex transaction. How about we get to it?

What Is PIP In Forex?

A pip is simply a movement in value of a currency, it can signal both a decrease and increase in the value of a currency pair. It can be said to be the unit of measuring value between two currencies.

Pips are an important method to calculate the performance of your trade decisions. Therefore you need to make sure that you are using a quality trading platform that has all the necessary tools including a quality user interface that allows you to see the pips in real time.

How to Calculate Forex Pips

If you are thinking about calculating pips, here are few tips:

A pip is usually the last decimal place of a price quote.

Most pairs go out to 4 decimal places, but there are some exceptions like Japanese yen pairs (they go out to two decimal places).

For example, for EUR/USD, it is 0.0001, and for USD/JPY, it is 0.01.

On trading platforms, the digit representing a tenth of a pip usually appears to the right of the two larger digits.

Here’s a pip “map” to help you to learn how to read pips

what is pip and pipette in forex trading
Image by baby Pips

There are Forex brokers that quote currency pairs beyond the standard “4 and 2” decimal places to “5 and 3” decimal places.

They are quoting FRACTIONAL PIPS, also called “pipettes.”

For instance, if GBP/USD moves from 1.30542 to 1.30543, that .00001 USD move higher is ONE PIPETTE.

1. To calculate PIP you need to first get the value of the currency you are trading, so, for example, you are trading $1,000 worth of a USD/Euro currency, and then you multiply that by 0.0001 which will get you a value of $0.1 per pip for the USD.

2. The next step is dividing the value of your pip by the number that the currency pair closed on.

So, for example, you are trading a USD/Euro pair with the Euro ending trading that day at 1.0358. To calculate this you divide $0.1 by 1.0358 which give you $0.97 per pip for the Euro.

3. Finally to find the results depending on the pips, so, for example, there is a 30 pip increase you multiply that $0.97 value of the Euro by 30 which gives you $29.1.

This $29.1 is your profit for that day if you converted the Euro back into USD.
Doing this calculation yourself has its benefits as you gain a deeper understanding of how forex trading works.

Also, you’ll be able to plan your trading strategies much better due to your increased involvement.

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