What is a Pip in Forex Trading?
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DeIf you are interested in Forex and regularly read analysis or commentary pieces, you are likely to have come across mentions of the term 'pip' or 'pips'. This is because a pip is a very common term in Forex trading. But what is a pip? This article will address this question, explaining the meaning of a pip, and how useful a concept it is when trading Forex.
A pip is an incremental price movement, with a specific value dependent on the market in question. Put simply, it is a standard unit for measuring how much an exchange rate has changed in value. Originally, a pip was effectively the smallest increment in which an FX price would move, though with the advent of more precise methods of pricing, this original definition no longer holds true. Traditionally, FX prices were quoted to a set number of decimal places – most commonly, four decimal places – and, originally, a pip was a one-point movement in the final decimal place quoted.
Many brokers now quote Forex prices to an extra decimal place; however, this means that a pip is frequently no longer the final decimal place within a quote. It remains a standardised value across all brokers and platforms, making it very useful as a measure that allows traders to always communicate in the same terms without confusion. Without such a specific unit, there would be a risk of comparing apples to oranges, when talking in generic terms such as points or ticks.
How Much is a Pip?
For most currency pairs, one pip is a movement in the fourth decimal place. The most notable exceptions are those FX pairs involving the Japanese Yen. For pairs involving the JPY, one pip is a movement in the second decimal place.The pip points table further below shows Forex pips rates for some common currency pairs.
Multiplying your position size by one pip will allow you to answer the question of how much a pip is worth. Let's say you are aiming to trade the EUR/USD currency pair, and you decide to purchase one lot. One lot is worth 100,000 EUR. One pip is 0.0001 for EUR/USD. The currency value of one pip for one lot is therefore 100,000 x 0.0001 = $10. Let's say you buy the EUR/USD at 1.16650, and later close your position by selling one lot at 1.16660. The difference between the two is:
- 1.16660 - 1.16650 = 0.00010
In other words, the difference is 1 pip. You will have made $10. If we work through these sample numbers from a different angle, we can further illustrate what a pip is in trading.
Forex pip value (1 lot)
Trading Pips Explained
Let's say that you opened your position at 1.16650, and you bought one contract. This is equivalent to buying 100,000 EUR. Notionally, you are selling dollars to purchase Euros. The value of the Dollars that you are notionally selling is naturally dictated by the exchange rate.
- EUR 100,000 x 1.16650 : USD/EUR = USD 116,650
- You closed your position by selling one contract at 1.16660. Notionally, you are selling the Euros and buying the Dollars.
- EUR 100,000 x 1.16660 : USD/EUR = USD 116,660
- That means that you originally sold $166,650, and ended up with $166,660, for a profit of $10. From this, we can see that a one-pip movement in your favour made you $10.
In fact, this trading pips value is consistent across all FX pairs that are quoted to four decimal places – a movement of one pip in the exchange rate is worth 10 units of the quote currency (i.e. the second-named currency) if you are dealing in a size of one lot (which is always 100,000 units of the base currency - the first-named currency). A move of 10 pips is worth 100 units of the quote currency. A move of 100 pips is worth 1,000 units of the quote currency, and so on. If you would like to learn more about Forex quotes, you can do so by reading the following article:
What About Currencies That Are Not Quoted to Four Decimal Places?
The most notable currency here is the Japanese Yen. Currency pairs involving the yen were traditionally quoted to two decimal places, and FX pips for such pairs are therefore governed by the second decimal place. So let's take a look at how to calculate pips with the USD/JPY currency pair: If you sell one lot of the USD/JPY, a downward move of one FX pip in the price will enable you to earn 1,000 yen.
Let's work through an example to see why:
The USD/JPY Currency Pip Example
- Suppose that you sell two lots of the USD/JPY currency pair at 113.607. One lot of the USD/JPY is worth 100,000 USD. You are therefore selling 2 x 100,000 USD = USD 200,000 in order to purchase: 2 x 100,000 x 113.607 = 22,721,400 JPY.
- Let's say the price moves against you and you decide to cut your losses. You close out at 114.107. One pip for the USD/JPY is a movement in the second decimal place. The price has moved against you by 0.50, which is therefore 50 pips.
- You proceeded to close your position by purchasing 2 lots of the USD/JPY at 114.107. To buy back $200,000 of USD at this rate costs: 2 x 100,000 x 114.107 = JPY 22,821,400.
- This is 100,000 JPY more than your original sale of Dollars gave you, so you have a shortfall of 100,000 JPY.
- Losing 100,000 JPY for a 50-pip movement means that for each pip you lost: 100,000/50 = 2,000 JPY. Since you sold 2 lots, this is a pip value of 1,000 per lot.
If your account is denominated in a currency that is different to the quote currency, it will affect the pip value. You can use our Trading Calculator to work out pip values with ease.
What does Pip Stand For?
Some say that the term "pip" originally stemmed from Percentage-In-Point, but this may be a case of false etymology. Others claim it stands for Price Interest Point. Whatever the origin of the term, pips allow currency traders to discuss small changes in exchange rates in readily understandable terms. This is similar to how its cousin – the basis point (or bip) – allows easier discussion of small changes in interest rates. This provides us with the most basic answer to what pips are useful for – it is much easier to say ''cable has risen 55 pips'', for example, than to say ''it's increased by 0.0055''. Let's take a look at how FX prices appear in MetaTrader 4 (MT4) to further illustrate 'what is a Forex pip':
Forex Pips: Prices in MT4
The image below shows an 'Order' screen for the GBP/USD currency pair in MetaTrader 4:
Source: MetaTrader 4 platform - pricing from Admiral Markets - GBP/USD order ticket - Accessed: 13 November 2017
The quote shown in the image is: 1.31190/1.31208. We can see that the figures for the last decimal place are smaller than the other numbers. This is to show that these are fractional pips. The difference between the bid and the offer is 1.8 pips. If you instantaneously bought and sold at this quote, the pip cost would be 1.8. If you look at the screenshot below of a different order ticket, you can see that the selected 'Type' is 'Modify Order':
Source: MetaTrader 4 platform - pricing from Admiral Markets - GBP/USD order ticket - Accessed: 13 November 2017.
Note that the Modify Order part of the window contains drop-down menus that allow you to quickly select levels that are a certain number of 'points' away. There is, therefore, an important distinction to be made between points and pips. The points in these drop-downs are referring to the fifth decimal place, in other words, fractional pips that are one tenth of a pip. If you select 50 points here, you will be choosing an order level that is just 5 pips away. A really good way to familiarise yourself with the pips in Forex prices is to test the MT4 platform using a Demo Trading Account. This account allows you to view and trade on live market prices but with zero risk, because you are only trading with virtual funds, so your capital is not at risk.
If you are interested in trading shares, you may be wondering if there is such a thing as a pip in stock trading. There is no usage of pips when it comes to trading shares, as there are already ready-made terms for communicating price changes: namely, 'pence' and 'cents'.
For example, the image below shows an order ticket for IBM:
Source: MetaTrader 4 platform - pricing from Admiral Markets - IBM order ticket - Accessed: 13 November 2017
The whole numbers in the quote represent the price in USD and the decimal numbers represent cents. This is readily understood and familiar for most traders. Therefore, there is no need to introduce any other terms, such as pips, though sometimes market jargon may include a generic term such as 'tick', to represent a movement of the smallest increment possible – in this case, one cent.
Whatever you are planning to trade, whether its CFDs in Forex, or CFDs on shares, you will want to be using the best trading platform available. This is why you should try out using the MetaTrader Supreme Edition (MTSE) plugin for MetaTrader 4 and MetaTrader 5. MTSE is a cutting-edge plugin that offers a much wider selection of indicators and trading tools compared with the standard versions.
You should now have the answer to the question of 'what a pip is in trading'. Being conversant with the unit of measurement for changes in FX rates is an essential first step on the path to becoming a proficient trader. If you enjoyed this discussion of FX pips in investing, why not take a look at our article on the best currency pairs to trade in Forex?
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.