If you’re new to forex trading, you may have come across the term “pip” and wondered what it means. Read ahead to find out the pip definition and instructions on how to calculate it!
What Is A Pip?
“Pip” is short for “percentage in point” or “price interest point”, and it’s a standardized unit of measurement that represents the smallest incremental change in the value of a currency pair.
What You Need To Know About Pips
Most currency pairs are quoted to four decimal places, and a pip represents the fourth decimal point. For example, if the EUR/USD currency pair is trading at 1.2000 and then shifts up to 1.2001, that’s a one-pip move.
However, some currency pairs, such as the Japanese yen, are quoted to two decimal places. In such cases, a pip represents the second decimal point. So, if the USD/JPY currency pair is trading at 108.50 and moves up to 108.51, it will also be considered a one-pip move.
In forex trading, pip values vary depending on the currency pair and the size of the trade. The pip value is calculated by multiplying the pip size by the position size (in lots). For example, if you’re trading the EUR/USD currency pair and the pip size is 0.0001, and your position size is one lot, then the pip value would be $10.
Understanding pips is crucial for:
- Calculating the profits or losses accurately. By knowing the pip value, traders can determine the amount of money gained or lost from each trade.
- Managing risk effectively. The pip value can be a means of guiding traders to setting stop-loss and take-profit orders at the appropriate levels.
- Comparing the spreads offered by different forex brokers. The spread is the difference between the bid and ask price of a currency pair, typically measured in pips. By comparing spreads, traders can find the most cost-effective broker.
Overall, without pips, it would be challenging for traders to perform these actions with a high degree of accuracy.
