WHAT IS A PIP?

LESS ON OUTLI NE

- Topic 1: Und erstanding Pips

- Topic 2: C a lc ulating Pip Value

- Topic 3: Pi ps and Profitabilit y

WHAT IS A
PIP?

BRIEF OVERVIEW
WHAT IS A
BRIEF OVERVIEW
PIP?

"Pip" is an acronym for percentage in point or price interest point. A

pip is the smallest whole unit price move that an exchange rate can
make, based on forex market convention.

Most currency pairs are priced 1 = 1/100th of 1%

out to four decimal places and
a single pip is in the last (fourth) A pip is thus equivalent to 1/100
decimal place. of 1% or one basis point.

For example, the smallest whole unit move the USD/CAD currency
pair can make is $0.0001 or one basis point.
WHAT IS A
PIP?

TOPIC 1
UNDERSTANDING PIPS
TOPIC 1 UNDERSTANDING PIPS

A pip is a basic concept of foreign

exchange (forex). Forex traders
buy and sell a currency whose $
value is expressed in relation to
another currency.

Quotes for these forex pairs

appear as bid and ask spreads €
that are accurate to four decimal
places.
TOPIC 1 UNDERSTANDING PIPS

USD/EUR

$ €
Quote:
0.0000
QUOTED TO THE 4TH
DECIMAL PLACE

Movement in the exchange rate is measured by pips. Since most

currency pairs are quoted to a maximum of four decimal places, the
smallest whole unit change for these pairs is one pip.
WHAT IS A
PIP?

TOPIC 2
CALCULATING PIP VALUE
TOPIC 2 CALCULATING PIP VALUE

The value of a pip depends on the currency pair, the exchange rate
and the trade value.

When your forex account is funded with U.S. dollars and USD is the
second of the pair (or the quote currency), such as with the EUR/USD
pair, the pip is fixed at .0001.

In this case, the value of one pip is calculated by multiplying the trade
value (or lot size) by 0.0001.

PIP Value = Trade Value x 1 PIP

1 PIP - This equals to your Pip value (it can be 0.0001 or 0.01)
Trade Value - The actual quantity of currency of your trade (e.g., $1000, $500).

TOPIC 2 CALCULATING PIP VALUE

So, for the EUR/USD pair,

- multiply a trade value of, say, 10,000 euros by .0001.

The pip value is $1.

- If you bought 10,000 euros against the dollar at 1.0801 and sold at
1.0811, you'd make a profit of 10 pips or $10.

TOPIC 2 CALCULATING PIP VALUE

On the other hand, when the USD is the first of the pair (or the base
currency), such as with the USD/CAD pair, the pip value also involves
the exchange rate.
- Divide the size of a pip by the exchange rate and then multiply by
the
trade value.

PIP Value = (1 PIP / Exchange Rate) x Trade Value

1 PIP - This equals to your Pip value (it can be 0.0001 or 0.01
Exchange rate - The actual exchange rate of your currency pair (the price)
Trade Value - The actual quantity of currency of your trade (e.g., $1000, $500).

TOPIC 2 CALCULATING PIP VALUE

For example,
- .0001 divided by a USD/CAD exchange rate of 1.2829 & then
multiplied
by a standard lot size of 100,000 results in a pip value of $7.79.

PIP Value = (.0001 / 1.2829) x 100,000

If you bought 100,000 USD against the Canadian dollar at 1.2829 and
sold at 1.2830, you'd make a profit of 1 pip or $7.79.

TOPIC 2 CALCULATING PIP VALUE

Japanese yen (JPY) pairs are quoted with 2 decimal places, marking
a notable exception to the four decimal place rule.

For currency pairs such as the EUR/JPY and USD/JPY, the value of a
pip is 1/100 divided by the exchange rate.

For example,
- If the EUR/JPY is quoted as 132.62, one pip is 1/100 ÷ 132.62 =
0.0000754.
- With a lot size of 100,000 euros, the value of one pip (in USD) would
be
$7.54.

WHAT IS A
PIP?

TOPIC 3
PIPS AND PROFITABILITY
TOPIC 3 PIPS AND PROFITABILITY

The movement of the exchange rate of a currency pair determines

whether a trader makes a profit or loss at the end of the day.

A trader who buys the EUR/USD will profit if the euro increases in
value relative to the U.S. dollar.

- If the trader bought the euro for 1.1835 and exited the trade at
1.1901,
they would make 66 pips on the trade (1.1901 - 1.1835).

TOPIC 3 PIPS AND PROFITABILITY

Now, let's consider

- A trader who buys the Japanese Yen by selling the USD/JPY pair at
112.06.

- The trader loses 3 pips on the trade if they close out the position at
112.09. They profit by 5 pips if they close it out at 112.01.

TOPIC 3 PIPS AND PROFITABILITY

While the difference may look small, in the multi-trillion dollar foreign
exchange market, gains and losses can add up quickly.

For example,

- on a $10 million position that closed at 112.01, the trader would make
¥500,000.

- In U.S. dollars, that's $4,463.89 ( ¥500,000/112.01).