As it is known, the forex market is a very low-cost investment tool compared to many financial markets. Investment in the Forex market is both very easy and very fast. This is because account management fees, brokerage fees, transaction commissions, etc. are not incurred.
So, the only thing to be considered in terms of cost when investing in the Forex market is the spread rate. This ratio is also the concept that constitutes the transaction cost.
Actually, the spread rate refers to the difference between the buying and selling price of the exchange rate, commodity or index to be traded. The spread rate is measured by a unit so-called ‘’Pip’’.
What is a Pip in forex trading? How is pip calculated in forex? What does pip stand in forex? How much a pip in forex trading? What are pips in forex?
In this article, I will present you the answers to all the questions above.
If you are interested in Forex and reading about it you probably met the Pip term. Pip is one of the first terms that investors who are investing in the forex market will face in the first place.
But, what is a Pip in forex trading?
A pip stands for Price Interest Point. A pip is the smallest unit that measures price movements in parities. Briefly; a pip is the fourth decimal value that indicates the changes in exchange rates.
There are three factors in determining the pip value. What the currency pair is, how much is the transaction size, whether the market is liquid or not. The economic, political behavior of countries affects liquidity.
Is a Pip important?
A pip is important because leveraged transactions are being made in the forex market. In this case, a small number of price changes can cause you to make a lot of profit. But it can also cause you to suffer.
Therefore, knowing the answer to the question ”What is a pip?” is vital for the calculation of profit and loss.
How is a Pip calculated in forex?
I told you that a pip is the fourth decimal point that shows the changes in exchange rates. The most remarkable exceptions are those FX pairs containing the Japanese Yen. For pairs containing the JPY, one pip is the change of the second decimal place.
If you multiply the position size by one pip, you will find the answer to the question of the ”How much a pip in forex trading?”.
Let’s say you are aiming to trade the EUR/USD currency pair, and you decide to buy 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 1.13350, and later close your position by selling one lot at 1.13360. The difference between the two is:
1.13360 – 1.13350 = 0.00010
In other words, the difference is 1 pip. You will have made $10.
If you are wondering What is Lot size in Forex; shortly, the lot means size or volume of your trades in Forex. For more information, you can check the link.
In the table below, you can see Forex pip rates for some common currency pairs.
|Forex Pair||One pip||Sample price||Lot size||Forex pip value (1 lot)|
|EUR/USD||0.0001||1.13354||EUR 100,000||USD 10|
|GBP/USD||0.0001||1.32486||GBP 100,000||USD 10|
|USD/JPY||0.01||113.745||USD 100,000||JPY 1000|
|USD/CAD||0.0001||1.25865||USD 100,000||CAD 10|
|USD/CHF||0.0001||0.98942||USD 100,000||CHF 10|
|AUD/USD||0.0001||0.7658||AUD 100,000||USD 10|
|NZD/USD||0.0001||0.67056||NZD 100,000||USD 10|
A pip Forex Example
Let’s suppose that you opened your position at 1.13350, and you buy one lot. This means the purchase of EUR 100,000. So, you are selling Dollars to purchase Euros.
- EUR 100,000 x 1.13350 : USD/EUR = USD 113,350
- You closed your position by selling one lot at 1.13360. So, you are selling the Euros and buying the Dollars.
- EUR 100,000 x 1.13360 : USD/EUR = USD 113,360
- That means that you originally sold $113,350, and ended up with $113,360, for a profit of $10. From this, you can see that a one-pip movement in your favor made you $10.
What about the situation in currency pairs not calculated from four decimal places?
The most remarkable currency here is the Japanese Yen. For pairs containing the JPY, one pip is the change of the second decimal place and the second decimal place governs FX pips for such pairs.
Let’s take a look at how to calculate pips with the USD/JPY with an example.
The USD/JPY Currency Pip Example
Let’s suppose that you sell two lots of the USD/JPY currency pair at 112.970. 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 112.970 = 22,594,000 JPY
- Let’s assume that things don’t go well, the price moves against you and you decide to cut your losses. You close out at 113.070. One pip for the USD/JPY is a movement in the second decimal place. The price has moved against you by 0.10, which is therefore 10 pips.
- You proceeded to close your position by purchasing 2 lots of the USD/JPY at 113.070. To buy back $200,000 of USD at this rate costs: 2 x 100,000 x 113.070 = JPY 22,614,000.
- This is 20,000 JPY more than your original sale of Dollars gave you, so you have a shortfall of 20,000 JPY.
- Losing 20,000 JPY for a 10-pip movement means that for each pip you lost: 20,000/10 = 2,000 JPY. Since you sold 2 lots, this is a pip value of 1,000 per lot.
What does pip stand in forex?
Pip changes from the instrument to the instrument!
I have exemplified the calculation of the pip value in the parities traded in the Forex market above. However, for all instruments traded in the forex market, including commodities, stocks, indices, bonds, and bills, the pip value may be third, second, or first decimal value.
You can see these examples on the MetaTrader4 platform.
The image below shows an ‘Order’ screen for the EUR/USD currency pair in MetaTrader 4:
The quote shown in the image is 1.14485/1.14496. You 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 1.1 pips. If you buy and sell this price immediately, the pip cost will be 1.1.
If you look at the screenshot below of a different order ticket, you can see that the selected ‘Type’ is ‘Modify Order’:
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. Therefore, there is 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.
The best way to get used to the pips in the Forex market is to gain experience using a Demo Trading Account on the MT4 platform. This account allows you to view and trade live market prices, but with zero risks, your capital is not at risk as you only deal with virtual funds.
A Pip on CFDs
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 following image shows an order ticket for IBM:
The whole numbers in the quote represent the price in USD and the decimal numbers represent cents. This is easily understood and known for most traders.
So that, there is no need to introduce any other terms, such as pips, though sometimes market language may include a generic term such as ‘tick’, to represent a movement of the smallest increment possible – in this case, one cent.
No matter what you plan to trade, it is in your best interest to use the best available trading platform, whether it’s CFDs in Forex or CFDs on shares.
What is Point in Forex?
The point is often used by Forex professionals, high volume trading, arbitrage, automated traders with Forex trading robots. The Point unit represents one-tenth of the pip. In short, the pip is 0.1 times the point.
However, generally, when calculating the point, the change in the fifth digit of the exchange rate is taken into account.
Let’s show the Point with an example;
The 21 points increase from 8.14265 to 8.14284 in the USD / SEK parity stands for 2.1 pips.
Now, I think you can answer the question of ‘what is a pip in Forex’. To be in touch with the unit of measure for changes in Forex rates is an essential first step towards becoming a competent trader.
This article 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.
So, don’t forget 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.