If you are interested in Forex, you are likely to have come across the term ‘pip’ or ‘pips’. This is a very common concept in Forex trading. But what is a pip? This article will address this question, explaining the meaning of a pip.
What is a pip in forex?
The unit of measurement to measure the change in value between two currencies is called a “pip.” This is represented by a single digit move in the fourth decimal place in a typical forex quote.
For example, if the price of EUR/USD moves from 1.1402 to 1.1403 this would be a one pip or ‘point’ movement.
Calculating forex price moves
Now that we are clear on what a pip is let’s see how much money we can gain or lose for each movement.
This can be calculated very simply:
- Positions size x 0.0001 =Monetary value of a pip
Here is a quick example using the EUR/USD as we have above:
We open a position size of 10,000 units and calculate the pip value as follows: 10,000 (units) x 0.0001 (one pip) = $1 per pip.
The exception – USD/JPY pips
When trading major currencies against the Japanese Yen, traders need to know that a pip is no longer the fourth decimal but rather the second decimal. This is because the Japanese Yen has a much lower value than the major currencies.
Pips is very useful as a measure that allows traders to always communicate in the same terms without confusion.