You’ve probably heard the term pips being thrown around.
Did you just smile and nod?
I sure have!
Today, you’re going to learn what they are and how their values are calculated.
Take your time with this information, read this as many times as you need, scream at your monitor as much as you need but make sure you understand it before moving onto the next lesson.
Just like a pip is the smallest part of a fruit, a pip in forex refers to the smallest price unit related to a currency.
Pip is an abbreviation for point in percentage and is the unit of measurement used to express the change in value between two currencies.
Professional forex traders express their gains and losses in the number of pips their position rises or falls.
For example, if the GBP/USD moves from 1.2713 to 1.2714, that 0.0001 rise in the exchange rate is 1 pip.
Fun fact: All major currency pairs go to the fourth decimal place to quantify a pip apart from the Japanese Yen which only goes to two.
So now that we know what a pip is, what does it mean to us in terms of how much money we make or lose for each movement?
This depends on the size of the position we open. Larger positions mean each pip movement in the pair will have a greater monetary consequence to our balance.
To calculate this is quite simple. Let’s take an example and stick with our GBP/USD pair.
Say we wanted to open a position size of 10,000 units.
Our calculation to establish what a one pip movement means to us is as follows:
10,000 (units) x 0.0001 (one pip) = $ 1 per pip
So a position of 10,000 means that every time the pair moves 0.0001 (or 1 pip), we make a profit or loss of $1.00 depending on which way it moves. If the position moves 100 pips, we will make a profit or loss of $100.
We can do this for a trade of any size. The calculation is simply the trade size x 0.0001 (1 pip).
5,000 (units) x 0.0001 (1 pip) = $ 0.50 per pip
50,000 (units) x 0.0001 (1 pip) = $ 5 per pip
125,000 (units) x 0.0001 (1 pip) = $ 12.50 per pip
The pip value is always measured in the currency of the quote currency of the pair, e.g. the currency on the right-hand size of the pair.
So in the example of the GBP/USD, we see our pip value is always in US Dollars.
If we were trading the USD/GBP pair, the pip value would be in Pound Sterling.
10,000 units x 0.0001 (1 pip) = £ 1.00 per pip
50,000 units x 0.0001 (1 pip) = £ 5.00 per pip
125,000 units x 0.0001 (1 pip) = £ 12.50 per pip
If the value of the GBP rises against the dollar by 10 pips then we would see a movie like this.
10,000 units x 0.0010 (10 pip) = £ 10.00 per pip
50,000 units x 0.0010 (10 pip) = £ 50.00 per pip
125,000 units x 0.0010 (10 pip) = £ 125.00 per pip
If the value of the GBP rises against the dollar by 100 pips then we would see a movie like this.
10,000 units x 0.0100 (100 pip) = £ 100.00 per 100 pips
50,000 units x 0.0100 (100 pip) = £ 500.00 per 100 pips
125,000 units x 0.0100 (100 pip) = £ 1,250.00 per 100 pips
And that’s all there is to pips!
Even though you’re now a pip legend, I know exactly what you’re thinking….
Do I really need to calculate all this every time I take a trade?
Hell to the naw!
I know I said to read this and scream at your monitors until you understand it, but I think now’s the right time to admit that there is an easier way…
Nearly all forex brokers will work all this out for you automatically (…and hey now you know how they calculate it!). Or you can always use this Pip Value Calculator.
You can thank me later.