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What is a PIP in Forex?

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Forex exchange isn’t a simple job. The currency and ETFs are hard to understand, and new investors are often lost in the complexity of the trading platform. They are often confused by what each term means, and how it might impact their forex strategy. Usually, forex trades take place in currency pairs; for instance, a EUR/USD currency pair means the buyer would be exchanging their euros for the seller’s dollars or vice versa. If you have started your forex trading, you would have noticed that the term ‘pip (s)’ is frequently used to determine the profit and losses on a trade. Do you want to know more about it?

In this blog, we are going to talk about what a PIP is, how to use and calculate it, and how it can help you make a profit. Always remember Forex trading is a risky market; if you aren’t well aware of how it works, making any profit would be challenging and failure would be the most likely outcome. You must learn the best techniques from experienced forex traders and educational resources to make the most of your investment.

What is a PIP in Forex?

PIP is an acronym for percentage in point; It represents the fourth decimal in a currency’s value in a currency pair. Pip is the smallest change in the base currency that is highlighted in the forex market. The variation in the currency pairs is often displayed up to four decimal places and pip is the last of them.

It can be hard to understand a pip in literal terms, so let’s first take an example to ease things. For instance, the EUR/USD conversion was originally at a value of $1.0151. Now, notice that at the fourth decimal place, you have 1 as the digit. If the value of the dollar falls in the currency pair to $1.0155 for each Euro, then the dollar falls by 4 pips.

The example might have made things easier to understand, so let’s dive a bit into the details. A pip represents 1/100 of 1%, so it is the fourth decimal point of any value. The value of a pip depends on the currency pairs you are trading with. If you are trading between EUR GBP, then the value of a pip would be represented as a change in the fourth decimal place of the euro or the pound. Nevertheless, there are some exceptions to the definition- 1/100 of 1%- of pip. Some currencies, such as the Japanese Yen, use pips to indicate a change in the 2nd decimal place.

For instance, if the exchange rate of the USD/ JPY pairs was 12.31 for $1 at the time of purchase and it rises to 12.27, then the value of the yen has risen by 4 pips against the dollar. The pip value in trades involving the Japanese yen is often higher than other currencies. Let’s talk about how traders use the pip value to determine their trading profitability.

How do you use a Pip?

As you might have understood from our above discussion, pips are necessary to judge the value changes in currency pairs. For casual traders, the change in the base currency is often negligible in the short run, and there are slight variations that might not look profitable. Nevertheless, for regular investors with a forex trading strategy, these minor variations are the principal source of profit.

Pip represents a tiny unit, i.e., the fourth decimal place. Although the changes in pips might not look very attractive to low-capital investors, traders can make a great deal from it. For instance, a USD trade with counter currency as the EUR might change with merely 5 pips in an hour, which translates into $0.0005. Although the number looks fairly small, it can bring great profits for intelligent investors.

If the change of $0.0005 occurs in a currency pair, an investor with a $5 million investment will make $2500 with a single trade. There are multiple opportunities to reinvest and earn while keeping the investment safe. As we talked above, the proportion rises to $0.05 in the case of a Japanese yen, which would result in a higher profit.

How do you calculate the value of a Pip?

Calculating the value of a pip is a fairly straightforward task. You would need to measure the change in the fourth decimal place of your exchange rate to calculate pips. For a currency pair, the value of a pip depends on your base currency and counter currency. In the case of EUR USD conversion, the value is easy to evaluate; you will have to just measure the change in the fourth decimal to calculate pips and then convert it into dollars.

It might get complicated for other currency pairs, such as USD/ JPY conversion with yen as the base currency. You will have to first drive the change of the pip value in Yen, and then convert it to dollars. The same goes for any other currency.

Several trading platforms now offer a spread description that describes the changes in a currency pair in terms of pips and dollars, so you won’t need to calculate it.

While we are at it, it is important to understand that pip is no longer the smallest unit of change, and several brokers have moved to a 5 place system. The fifth place is called “fractional pip” or “Pip”. It is 1/10th of one pip and is usually used to understand the slightest changes in the exchange rate. Although fractional pips don’t usually motivate transactions, they serve as a signal to the future of the trade.

Conclusion: What is a PIP in Forex?

We have discussed a fair bit of details about the ‘percentage in point’ or ‘price interest point’, and I am pretty sure you would have a good understanding of it by now. In the most precise terms, Pip is 1/100 of 1% and is measured at the fourth decimal place for most currencies, except for the yen.

Currency trading is a complex subject, but it gets interesting after each chapter. You must ensure that you are well aware of the subject before you dive in with your precious investment. The easiest source to learn about the market is by seeking help from professional traders. There are multiple courses that you can opt for, we shall share one of them with you shortly.

If you are a new forex trader looking for a good exchange, we would recommend AvaTrade and FXCC. Both these brands have been serving US customers for a long time, and they have built a reputation for quality services at low prices. The advanced trading platforms and easy customer support are useful perks to ease your journey.

Remember that foreign exchange isn’t a gamble; there are various factors that work alongside the market to determine the value of the forex pair. To ease your journey, you must partner with either an excellent coach or a renowned brokerage that can provide you with independent financial advice.

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Photo: asiaforexmentor.com
Photo: asiaforexmentor.com

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What is a PIP in Forex FAQs?

How much are 100 pips worth?

The answer to the question is dependent on the lot size. A standard lot consists of 100,000 units of currency. However, Meta trader 4 allows you to trade 0.01 of the lot size. If you go for the smallest lot with the US as the second currency, the value of 1 pip will drop to 10 cents. In this case, the change of 100 pips would be equal to $10.

How many dollars are 100 pips?

The final value of 100 pips varies, depending on your lot size. If you have opted for a standard lot of 100000 units, one pip would equal $10. Thus, if the value of the US dollar changes by 100 pips for a standard lot, the value would vary by $1000.

How many dollars are 50 pips?

After our above discussion, we know that the value of a pip is dependent on your lot size. Hence, when the dollar value changes by 50 pips for a standard lot, it would translate to a monetary change of $500 in your portfolio.




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