Pip is an acronym for percentage in point or price interest point. In FX pairs, the smallest unit of change in an exchange rate of a currency pair is referred to as a “pip”. A single pip is in the fourth decimal place and equals a change of 0.0001.
For example, if today the EUR/USD rate is 1.1110 and tomorrow it’s 1.1121, that would mean that the pair has moved upwards by 11 pips.
However, Yen crosses differ as a pip is quoted with two decimal places. Therefore, one pip in these crosses equals 0.01.
Also, when discussing the pip, it’s important to mention the fractional pip, sometimes called a pipette. A pipette is a fraction of a pip equal to a tenth of a pip. It is in the fifth decimal place and gives more accuracy in calculating profits/losses.
A pip can also be expressed in monetary terms based on three factors: the currency pair, the exchange rate and the size of the trade.
Let’s explore how these factors connect to determine the monetary value of a pip.
For example, if I trade a full lot in EUR/USD one pip change would equal $10. If I open a long position in EUR/USD at 1.1100 and it moves up to 1.1200 this means that the pair moved upwards by 100 pips. At the same time, I would have gained US $1000. This is because my position size was €100,000 and the exchange rate increased by 0.0100 (100 pips) resulting in a profit of $1000.
e.g. 100,000*0.0100=$1000.
Each pip in the EUR/USD’s movement equals $10.
Note that the position size is mentioned in the base currency, while the pip value is mentioned in the variable currency.
This can be expressed as:
Pip value=Pip size * Position Size
For each pip of a full lot of EUR/USD this would be €100,000*0.0001=$10.
To convert the pip value back to the base currency, simply divide the Pip value by the current exchange rate of the relevant currency pair.
Pip value = (Pip size * Position size) / (Exchange rate).
For example, if your account is in pounds and you want to know the pip value in pounds, you can change the dollar pip value using the GBP/USD rate.
So, for 1 lot: $10 / (GBP/USD)
With a few repetitions using different exchange rates, you will be able to calculate the change in exchanges rate in pips.
Note that Pips apply only in the FX market. Changes in the value of stocks, gold and oil are measured in dollars and cents, while indexes, especially for shares, are measured in ticks.
