What is a pip?

A pip is short for “price interest point” or “percentage in point.” It is the standard unit used in forex, and it also used to be the smallest price move that one could make in the forex market. 

This standardized unit is located in the fourth decimal point of most currency pairs. An exception to the rule is for Japanese pairs where the pip value is located in the second decimal point. 

The smallest movement a pip could make is equal to 0.0001, 1% of 0.1, or one basis point. When a pip in a forex currency pair changes in value, that means that the exchange rate of a forex pair is changing due to supply and demand.

Through knowing and understanding pips in general, traders are able to calculate their probable gains and losses if the exchange rate hits their target price or stop loss points. Keep in mind that each forex pair has two different exchange rates shown, and these are for the bid and ask prices of the same pair. Traders use the term “spreads” for the difference between the bid and ask prices.

What is a pipette?

A pipette, also known as a fractional pip, is the smallest unit used in forex and is a tenth of the value of a pip. Unlike the pip, a pipette is found in the fifth decimal place of a forex pair most of the time.

This value is not always offered by brokers but is just an added service so that traders can pay more attention to the exact price. With this, traders will be able to gain more or lose less if they observe the pipette value.

What are the basis points?

Basis points are also important in the forex trading scene because it is a unit used to measure interest rates. You will also find basis points noted down in its abbreviations such as “bps,” “bips,” or “bp.”

Knowing about basis points is also important because it’s being discussed, especially during important market-moving news. You will hear this term when the Federal Reserve Board usually changes interest rates by a certain number of points or when a bond has its yield increase.

If your bond yield has increased by 100 basis points from a value of 2%, this means that the resulting yield will become 3%. Likewise, if the Fed increased changed rates by 60 basis points, this would be interpreted as a 0.60% change.

What is the difference between a pip and a pipette?

A pipette is simply a smaller version of a pip and is always located in the digit to the right of a pip. A pipette will always have a value of 1/10th of a pip.

Some brokers allow their exchange rates to be listed with a pipette value for better control of slippage through spreads. This allows lesser losses and more gains for traders if used correctly.

Additionally, having a pipette value allows for a more accurate valuation of orders, transactions, and assets in the portfolio. Aside from what’s mentioned above, both pip and the pipette have the same function, which is to denote actual price or price changes to a certain degree.

How many pips a day do forex traders make?

There is no limit in the number of pips a forex trader can make in a day. However, you must keep in mind that each currency pair usually only moves by an average of 100 pips per day regardless of direction. Reaching more than 100 pips per day is challenging but doable.

With that in mind, it is best to set more realistic expectations on how much you should earn per day. A bunch of successful forex traders only need to capture or trade 20 pips per day to achieve their set trading goals, while others aim for a higher goal of 50 pips.

Each trader is different in terms of strategy, and that’s why it’s best to know how much you could constantly earn without risking more than what’s needed. Even with 20 pips per day, a trader could leverage their gains through margin as well as consistency throughout the trading year.

Spreads

The difference between the bid and ask price of a currency pair is known as spreads. These function like a commission for brokers and are considered a small price to pay when trading forex.

Spreads vary depending on the asset you trade and the broker you select. Brokers compete for clients by offering tight spreads because this is one way for traders to make more money.

Naturally, major currency pairs such as EUR/USD and USD/CHF have tighter spreads because they are more liquid and have better market participation. Minor currency pairs, which are traded with less volume, don’t have optimal spreads but are still better than exotic currency pairs, which aren’t popular in the forex market.

Once in a while, you will encounter a broker that offers zero spread accounts which allow users to trade with virtually no spreads. However, when using this type of account, you’re going to be charged with commissions or other kinds of fees.

How is a pip used in forex?

As previously mentioned, a pip is a unit used to measure forex pairs’ movements. Not only is this used when calculating spreads, but it’s also used when determining your losses or gains in pip values. Below, we will be discussing how to calculate the value of one pip of any currency and how we can determine your P&L through pips.

Calculating the value of a pip

The first step to knowing the value of a pip is understanding that this value differs depending on the exchange rate of your chosen currency. A pip in EUR/USD does not have the same value as a pip in GBP/CAD.

A simple formula could be used to determine the value of one pip.

0.0001 quote currency * 1/exchange rate = 1 pip worth in base currency

Example 1:

Let’s take EUR/USD’s exchange rate as an example. It currently has a value of 1.1755. By using the formula, the mathematical statement becomes:

0.0001 USD * 1 GBP/1.175 USD = 0.00008507018 GBP per pip or per unit.

If you traded a standard lot, the pip value would be equal to roughly around 8.5 GBP per pip.

Example 2:

A trader wanted to find the value of 1 pip of NZD/JPY, which currently has an exchange rate of 76.552. If you can recall, JPY pairs have their pip value located in the second decimal place. Thus, our formula becomes

0.01 quote currency * 1/exchange rate = 1 pip worth in base currency

By using the formula, we come up with

0.01 USD * 1 NZD/76.552 JPY= 0.00013063015 NZD per pip or per unit.

When a standard lot is traded, each pip would have a value of 13.06 NZD.

Calculating profits and losses by using pips

The most important formula that you must learn as a trader is calculating your profits and losses by using pips. Pips are really important, especially when you’re day trading because you’re losing a lot from spreads. Knowing at what price you’ll be profitable will really allow you to avoid losses that could have otherwise been good trades.

The formula for long trades is shown below.

(Closing price – Open price) x # of lots x 100,000 units per lot = P&L in the base currency

Question:

If a trader decides to day trade EUR/USD with an entry price of 1.1764 and closes their trade at a wonderful 1.1864 for a total of 100 pips, how much will they gain if their total trade size is ten standard lots?

By substituting the values in the formula, you will end up with the mathematical equation below.

(1.17749 – 1.17649) x 10 of lots x 100,000 units per lot = 10,000 USD

How to find the pip value in the currency of your trading account

We previously discussed how to find the pip value of a certain currency. Now, to see this value in the currency of your trading account, you simply need to use the exchange rate between the original currency and the currency of your account.

We’re going to use the two examples in our “Calculating the value of a pip” section for both calculations. Generally, the solution to convert a currency can be one of the two solutions listed down below.

Amount in quote currency / Forex pair’s exchange rate = value in base currency

Forex pair’s exchange rate * amount in base currency = value in the quote currency

If we use the first example earlier, our formula becomes

1.175 GBP/USD * 0.00008507018 GBP = 0.00009995746 or 0.00001 USD

Additionally, our second example’s formula is

76.552 NZD/JPY * 0.00013063015 NZD = 0.00999999924 or 0.00001 JPY

Do I need to calculate pips for every trade I take?

As a trader, you need to know how many pips you’re losing on every trade because, if added up, you would realize that a significant amount is taken away through the form of supposed potential gain. However, you can rest easy because you don’t need to calculate using the formulas above normally.

Brokers tend to have a calculator built-in on their website or on their platform. Some websites also host free-to-use calculators that can solve for pip values, profits, and loss and can even calculate data if you decide to trade forex derivatives.

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