What are Pips in Forex trading and what is their value

In recent years, commission-free brokers have become very popular. These brokers work with spreads, or centesimal variations, which allow for matching a buy (bid) and a sell (ask) operation. This is known as the pip.

pip forex

In this article, we will explore what a pip is and how it works.

What is a Pip?

Pip (Point in Percentage or percentage point) is the smallest possible change that can be seen in the price of a currency. In other words, the Pip is the minimum variation that we can observe in the quotation of an exchange rate or currency pair.

To understand the meaning of the pip and the way to calculate its value, you must remember what the base currency and the quoted currency are

In a currency pair, the base currency is the first one. In the example of the pair EUR/USD quoted at 1.2900, it means that the base currency is the Euro and that 1 euro is worth 1.2900 dollars. When you buy the pair EUR/USD in the foreign exchange market, you are buying the base currency (the Euro) and selling the quoted currency (in this case, Dollars).

The pip, as a unit in which an exchange rate can vary, is used to measure the profits and losses of an operation. For example: if we buy in the pair EUR/USD at 1.2900 and sell at 1.2930, we would have earned 30 pips with the operation.

pip forex trading

As you have observed, the exchange rate or pair EUR/USD has four decimals. This means that the minimum variation in an exchange rate is 0.0001 and that minimum variation is a pip. Almost all currency pairs have four decimals, so the minimum variation for any pair will still be 0.0001.

what is pip

However, in the forex currency in currency pairs the Japanese yen is present, the minimum variation is 0.01. So, the exchange rate will be formed by only two decimals. For example, If in the USD/JPY pair, we make a buying operation at 81.00 and sell at 81.23, we would have won 23 pips.

pip in forex

So, currency prices were quoted to a certain number of decimals (most of the time, four decimals). Then a pip is a movement of one point in the last decimal indicated. But many brokers now add a decimal in their quotes, so this implies that a pip is no longer the last decimal in a quote.

In summary, The Pip is the last decimal in a currency pair and expresses the minimum variation that a currency pair can experience in the forex market.

How does the Pip work in Forex?

Well, we already know what a pip is in theory. But what about how it works in practice? How is it calculated? And above all, is there any kind of strategy to trade forex, based on a pip goal?

How much is a Pip in Forex?

In most currency pairs, a pip is a variation in the fourth decimal place, except, in the case of the Japanese yen, where it is the variation in the second decimal.

It should also be noted that the value of a pip in forex has a close similarity to the size of the contract or volume of lots. This way, the value of a pip in currencies refers to the value of a basic contract. 

Therefore, for a contract with a nominal value of 100,000, the value of a pip in forex for a standard lot is equivalent to 10 units of the quoted currency, unless we are talking about the Japanese yen, in which case the value is 1000.

This way, a variation of 1 pip is equivalent to 10 units of the quoted currency. A variation of 10 pips is equivalent to 100 units of the quoted currency.

How much is a Pip in indices?

The issue of pips in indices is different from forex. In the case of indices, it does not refer to a decimal but to a unit of the index itself.

Even in indices, it is unusual to talk about pips but rather to talk about points. For example, the index has risen 30 points, and not the index has risen 30 pips.

And it is normal, since in indices, 1 pip is equivalent to 1 point.

How to calculate the value of the Pip?

The value of the pip helps to determine how much you have won or lost in an operation, that is, how much you have gained or lost in money (in euros, dollars, etc).

To determine the value of the pip, we need to know the volume of the trade or the number of lots (expressed in the base currency) used for the trade. This is crucial because the value of the pip varies depending on the number of lots. Let's recall the sizes of the traded lots:

  • A Standard lot is 100,000 monetary units of the base currency in the pair.
  • A Minilot is 10,000 monetary units.
  • A Microlot is 1,000 monetary units.

To calculate the value of the Pip, you have to perform a simple mathematical operation, from which we will obtain the profit obtained per pip in the base currency:

Examples for the calculation of Pip's:

Let's imagine we buy 1 mini-lot of EUR/USD at 1.2900 and sell it at 1.2930:

  • The pip size in this case is 0.0001
  • The exchange rate is 1.2930
  • The volume of the transaction is 10,000 euros

(0.0001/1.2930) x 10,000 = 0.773395 euros per pip

With the given formula, you would have obtained the value of the pip in Euros. Using this calculation, we would simply need to multiply it by the pips gained in the operation, along with the total profit of the same, if our account were denominated in euros.

But usually, accounts are denominated in dollars. In this case, we would only have to multiply the above formula by the exchange rate:

(0.0001/1.2930) x 10,000 x 1.2930 = 1 dollar

In all operations in which the account is denominated in dollars and the dollar is the quoted currency, a pip will be equal to 0.1, 1, or 10 dollars, depending on whether the lot is micro, mini, or standard lot respectively.

Example with USD/JPY: We bought a mini-lot at 78.00 and sold it at 78.54. Applying the formula, we obtained a result of:

(0.01/78.54) x 10,000 = 1.2733 dollars per pip

In this case, the value of the pip is already expressed in dollars, since the base currency is dollars. So, if our account were in dollars, we would not have to make any more calculations.

But what if it had been the pair of currencies EUR/JPY? Suppose the above formula gives us a value of 0.9969 euros per pip, and our account is denominated in dollars. Then we would multiply the previous result by the exchange rate USD/EUR and then by the number of pips obtained.

How many Pips is a dollar?

Let's go to the pair EUR/USD, in which the value of one lot is 100,000 euros.

A pip is 0.0001, so the monetary value of a pip for a Standard lot would be 100,000 x 0.0001 = 10 dollars.

Therefore, the profit or loss would be $10 per pip in the EUR/USD.

For example, we buy EUR/USD at 1.16680 and sell at 1.16690. The difference is 0.00010, so the profit of this trading operation would be 10 dollars.

Examples for Pip calculation

When calculating the pips you can gain or lose in forex trading, three elements must be taken into account:

  • Entry price
  • Exit price
  • Pip value

The idea is very simple: The calculation is done using this formula > (Exit Price – Entry Price) / Pip value

The resulting value will be the price oscillation in pips

Let's imagine that, as a pair, we enter at 1.20502 and leave at 1.21112. Therefore, you will have your profit as:

(1.21112 – 1.20502) / (0.0001 * 10,000) = 61 pips of profit.

How many Pips should be sought per day? | The 20 pips strategy

In forex, the so-called 20 pips per day strategy seeks to gain 20 pips every day.

For this, you must choose a pair with high volatility for intraday operations and one with the tightest spread or gap possible.

Operations will be conducted from 12:30 GMT, and an important requirement is that there is no economic news that strongly affects the market since it would be like throwing a coin in the air. Therefore, the ideal situation is that there are none, and if there are any, you will wait for their release and for the final impact to subside. This strategy is not recommended during the Asian session.

Basically, you should operate based on the following criteria:

  • Two moving averages of period 5 and period 144 are taken.
  • Buy when the 5 average crosses the 144 average upwards.
  • Stop loss 15 pips below the entry price.

The objective is 20 pips from the entry price. Once the objective is reached, you close your position.

What you should take note of in this strategy

Two aspects that you should know about the valuation of pips and its calculation are:

  • It is common practice for many Forex brokers to express currency pairs with five decimals in pairs in which a pip is the fourth decimal and three decimals in pairs in which the value of the pip is the second decimal (pairs in which the Japanese Yen is present). This should not lead you to any confusion, the value of the pip will still be the fourth or second decimal respectively. In these cases, you can interpret the last decimal as the tenth part of a pip.
  • The success of an operation measured in money will depend on the volume with which you have done it. If you win $100 in an operation, it is not the same to have won it with a micro-lot than with a standard lot since the value of the pip also depends on the volume of the operation.

Conclusively, we hope to have facilitated the task of understanding what a pip is and how it works. After all, the forex market is the most traded in the world, and the one that allows the greatest leverage by regulatory bodies.

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How do I Calculate the value of a Pip in Forex?

Calculate value of a pip by performing a simple mathematical operation based on the pip size, exchange rate, and volume of the trade. The formula involves dividing the pip size by the exchange rate and then multiplying the result by the volume of the trade.

How Many Dollar is a Pip?

The monetary value of a Pip depends on the base currency of the pair. Therefore, if you're trading in Dollars, you profit/loss will be dollars and. the value of the pip loss/gain depends on the lot size you're trading on.
With the Standard lot size, $10 implies one pip. Then $1 and $0.1 for Mini lot and Micro lot respectively.

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