In forex trading, a pip is a unit of currency. The Pip represents the smallest price change that a currency can make against another currency.
When forex traders talk about pips, they’re referring to the fourth decimal place. If you’re trading the British pound against the U.S. dollar, a pip is equivalent to a one-hundredth of a penny. This post will discuss what a pip is, how it’s used in forex trading, and more.
So, if you’re interested in learning more about pips, read on.
What is a Pip in Forex?
The word Pip is a short form for Percentage Interest Point and is also known as the Price Interest Point. Usually, a Pip is the minimum price increment for a pairing of a currency. For example, if the price of a currency pairing fluctuates by 0.001 (negatively or positively), it is considered that the price has moved by one Pip.
However, if the price of the currency pairing fluctuates by 0.007 (negatively or positively), it is considered that the price has moved by seven Pips. So, for example, the price of the EUR/USD currency pair moves from 1.0750 to 1.7058 US dollars, then the price of the currency pairing has risen by 8 pips ($ 0.008).
Another example is that if the price of the EUR/USD currency pairing has increased from 1.0750 to 1.0785 US dollars, the Pip value has risen by 35 ($ 0.0035). This example showcases a Pip value by using the 4th digit after the decimal.
However, some other currency pairing such as USD/JPY, AUD.JPY, GBP/JPY, and EUR/JPY are expressed using the 2nd digit after the decimal. So, for example, if the price of the USD/JPY currency pairing moves from 110.10 to 110.90, then the price of the Pip has risen by 80 ($ 0.80).
How to Measure the Pip Value?
Some steps need to be followed to measure the value of the Pip on the Forex chart, and they have been stated below:
- Find the movement of the Pip price on the Forex chart
- Figure out the beginning of the price movement
- Mark the end of the price movement
- Subtract the price at the beginning of the movement from the price at the end of the movement.
For example, if the price at the beginning of the movement is 1.1160, and at the end of the movement is 1.1045. So now we need to subtract the two prices (1.1045 – 1.1160), and the final answer is -0.0115. The final result means that the price of the Pip has fallen, and the EUR/USD currency pairing value has also fallen by 115 Pips.
How to Measure the Bullish Pip Value Movement?
For example, if the price at the beginning of the movement is 1.12970 and the price at the end of the movement is 1.12450. Then, we need to find the difference between the two prices (1.12970 – 1.12450), and the final answer will be 0.0052.
The final answer indicates that the price of the EUR/USD currency pairing has risen. Thus, in this scenario, we can say that the EUR/USD currency pairing has a seen a Pip value increase of 52.
How to Calculate the Pips Value in Forex?
When the price is moving in your favor, your opening position will rise in value. However, when the price movement is not in your favor, the value of your opening position will decrease significantly. So how much is the incremental loss or gain? For this we need to calculate the Pip value of the currency pairing we are trading.
If we are trading the USD/CHF currency pairing at 0.9920, this means one U.S. dollar: 0.9920 Swiss Francs. We can convert this number into the Pip value by plugging the values in a formula: 0.001/Currency exchange rate. So when we plug in the values (0.001/0.9920), the final answer is 0.001008065.
So, if you buy the USD/CHF currency pairing at 0.9920, and the Pip value of the pairing increases by one (0.9921), your profit will be 0.001 dollars for every unit you purchased.
Forex Trading PIP Spread
The spread measurement is done in PIP, a small movement in the value of the currency pair price, and the last decimal point is 0.001. However, the Japanese Yen is the only currency where the decimal point is 0.01. Therefore, a wider spread indicates a greater difference between the two prices.
A wider spread indicates high volatility and lowers liquidity, whereas a lower spread indicates lower volatility and higher liquidity. Therefore, when trading a currency pair with a tight spread, the trader will pay a spread cost.
While trading Forex, the spread will either be fixed or variable. The spread for forex currency pairings is variable, so when the price of the pairing and the bid change, the spread changes.
Forex Trading Frequently Asked Questions (FAQ)
- Who owns Forex, and where is it located?
Forex does not have a particular owner; it is an interbank market, which means transactions occur between sellers and buyers. Therefore, as long as the current banking system exists, Forex will exist as a specific government or country that does not run it.
- Working Hours of Forex?
Forex opens at 22:00 GMT on Sunday (Australian trading session opens) and closes on Friday 22:00 GMT (U.S. trading session closes)
- How Much Money is Needed to Start Forex?
Some traders start trading with just a dollar; however, the starting amount varies from 100 to 100,000 dollars.
- Best Strategy for Forex?
No one strategy is better than the other one; traders must develop new strategies all the time. Some Forex strategies are only beneficial in the short term.
- Can I Lose more than What I Invest in Forex?
Not really; the broker will not let the trader face huge losses and will not allow the loss to be greater than the amount in the trading account.
Conclusion
This article contains all the necessary information regarding Pip and what it means in the Forex market. Pip is an important concept, and if you are to trade in the Forex market, you need to be aware of it.
We have also given several examples in this article of how to study the Pip value in the chart and how to measure and calculate it. Once you have read all the information we have discussed in this article, you will have a lot of clarity regarding Pip.