06. What is Pip in Forex Trading?
In forex, the most common term you will hear is the word PIP. In this lesson, we will elaborate on what is a pip in forex trading? How you can calculate pip in forex?
Pip in Forex Trading?
Pip is the tiniest price/value change in a currency pair. In forex trading pip is the most basic unit of calculating your profit and loss. For example, you might hear a trader saying I made 90 PIPS profit. This means that the trader has made profit of 90 pips. Depending on your leverage/lot size, this one single pip movement in price can be a high amount of profit or loss.
Also note that, pip amount does not mean actual cash amount. The actual cash amount against the pip amount depends on the pip value. We will talk about pip value later on this article.
Let’s understand what is a pip in forex trading through an example-
If EUR/USD price has moved from 1.5001 to 1.5002, it means that EURUSD has moved ONE PIP higher.
A pip is the last decimal number or place in a price quote. Most of the forex currency pairs have 4 decimal places, however, some currencies like the YEN have two decimal places. So, usual currencies like the EURUSD is 0.0001 and for USDJPY it will be 0.01.
Trade Sample on EUR/USD:
| Entry | Long EUR/USD at 1.3505 |
| Exit | Close EUR/USD at 1.3525 |
| Profit/Loss | +20 Pips |
If you buy EUR/USD at 1.3505 and sell at 1.3525, you would have made 20 pips.
Trade sample on USD/JPY:
| Entry | Short USD/JPY at 88.95 |
| Exit | Close USD/JPY at 89.25 |
| Profit/Loss | -30 Pips |
If you sold USD/JPY at 88.95 and exited at 89.25, you would have lost -30 pips.
Any quote price beyond 4th or 2nd decimal places is called pipettes or points. So, if GBP/USD moves from 1.30000 to 1.30001, then that 0.00001 USD move is one pipette.
Here is a how you can read pips-
What is a tick in forex trading?
Tick is the smallest change/move of a currency/asset. For example, if your broker only updates the price after every $0.50 move, then the tick size is 0.50. And your currency pair price movement will be similar to this tick size, i.e. 100.00, 100.50, 101.00… Again the increase and decrease factor will depend on your broker’s tick size.
What is the Difference Between a Pip, Tick and Tick Size?
Pip and Tick in forex trading are almost synonymous. As we have seen, pip is the smallest incremental price move of a currency. Tick size is the smallest possible change in price – very similar. With 4-digit brokers, the EUR/USD has a tick size of 0.0001, which means that the smallest increment that the price can move from 1.3840 would be up to 1.3841 or down to 1.3839.
How to Calculate Pip value?
Pip value depends on three things and based on these, value of a single pip can have a big impact on the value of your trade-
- The currency pair being traded
- The size of the trade
- The exchange rate.
Suppose you enter a $50,000 position with USD/CAD forex pair. You decide to close the trade when USD/CAD price reaches 1.3050. You gained 50 pips from this trade. Here’s how you can calculate pip value or profit in money amount–
- Find out how much each pip is worth in CAD:
Take the trade amount ($50,000) and multiply it by 0.0001 (the standard way to represent one pip in forex trading)
So, $50,000 x 0.0001= $5 per pip in CAD
- Calculate the value of each pip in USD:
Divide the value per pip in CAD (from step 1) by the current exchange rate (1.3050)
So, $5 ÷ 1.3050 = $3.83 per pip in USD
- Calculate the total profit/loss:
Multiply the number of pips gained (50 pips) by the value of each pip in USD (from step 2)
So, 50 pips x $3.83 = $191.50 in Profit
Therefore, you made $191.50 profit from your $50,000 trade by gaining 50 pips with USD/CAD.
Free Pip Calculator
If you find all these math difficult, then don’t worry. You can use SureShotFX Pip Calculator app from Google Play Store. This free app will help you calculate pip for any trade. Additionally, it will help you calculate pip value according to your contract size.
This is what you learned today-
- Pip is the smallest movement in forex trading
- How to calculate pip
- Tick is the smallest value movement in forex trading
- Difference between pip, tick and tick size
- How to calculate pip value
- Free Pip calculator
