Forex Newbie – What is a Pip?

 

When venturing into the world of trading, it is very important that you understand the concept of PIP’s, since this is how you will determine your potential risk and reward, as well as your actual profit and loss in any given trade. It is also very important to understand exactly how your specific broker is reporting because some brokers are now stating PIPS when they are in fact reporting fractional pips which have a much smaller value. More on that in a minute.

So what is a PIP?

The standard unit of measurement used to determine the movement of price in forex trading is called a PIP, which stands for Price Interest Point. Price can be said to have moved up or down a certain number of PIPS

Depending on which asset or instrument you are referring to, the PIP is almost always the fourth decimal place in a price quote.

As an example in the following quote for AUD.USD currency pair:

0.7521

The ONE represents a single PIP.

Therefore if price moves as follows:

From 0.7521 to 0.7529, price has moved a total of 8 PIPS.

From 0.7529 to 0.7559, price has moved 30 PIPS.

As mentioned, the PIP is almost always the 4th decimal place in the quote. However there are some exceptions to this rule, namely the Japanese currency pairs, aka the Yen pairs. The Yen pairs, such as USD.JPY, GBP.JPY, EUR.JPY are expressed to just two decimal places.

So in this USD.JPY price quote, expressed as 112.89
The NINE represents 9 PIPS.

Your monetary gains or losses are based on the amount of dollars per pip in the trade. So in order to know how much a certain number of pips gained or lost is, you first need to know the $ value per pip, that was applied to a trade. You can insert whatever currency you trade in. As a simple example, if $1 per pip was risked and price moved 75 pips then your 75 pips is equal to $75.

Most brokers will calculate the monetary value of a PIP automatically for any given currency, and you can also use the following FOREX PIP VALUE CALCULATOR.

The Pip Calculator is powered by Investing.com UK

Some Brokers are adding a fifth decimal place to their quotes (and in the case of Yen pairs a third decimal place). This additional digit tagged onto the price quote is actually a fraction of a PIP, or fractional PIP and represents one tenth of a PIP.

So if price is expressed as 0.32541

The ONE is equal to ONE tenth of a PIP.

NOTE: Some brokers are stating PIPS when they are actually talking about fractional PIPS, hence the importance of understanding how to calculate the PIP value for yourself in order to avoid confusion. .

The terms fractional PIPS, points and pipettes are interchangeable and refer to the additional decimal place. Therefore:

1 PIP = 10 points/pipettes/fractional PIPS
10 PIPS = 100 points
100 PIPS = 1000 points

You can find further explanation regarding this on Oanda’s website below, or refer to your individual broker for clarification

http://www.oanda.com/forex-trading/learn/intro-to-currency-trading/conventions/pips

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