Forex Pips Demystified

Short for percentage in point, a pip refers to a very small measure of change in a currency pair in the forex market.

11:48 14 November 2019

Pips can be measured in terms of the underlying currency or the quote value. It basically represents the smallest amount by which a currency quote can change for example for the U.S dollar related currency pairs, it is usually $0.0001 and is more commonly referred to as a hundredth of 1%. This standardized size helps protect investors from big losses. Case in point, if a pip was 10 points instead of the 1 point, a one-pip change would cause greater volatility in currency values. Knowing about pips forms the foundation of forex trading but it’s important to know a lot more to become a successful forex trader.

How Forex Pips Work

Most of the currency pairs have one pip as the movement in the fourth decimal place. An exception to this is the Japanese Yen where one pip is represented by a unit movement in the second decimal place.

The worth of a pip is calculated by multiplying your position size by one pip. For instance, if you want to trade EUR/USD pair and you decide to make a single buy order, this lot would be worth 100,000 EUR. However, the currency value for one pip of one lot becomes 100,000 * 0.0001 which is equivalent to $10. If you were to buy the EUR/USD at 1.16670 and later close the trade at 1.16680, the difference between the two (0.00010) is one pip which will have made you $10. The lot size determines how much reward or loss you make for every pip movement.

Trading pips values are consistent across all Forex pairs quoted to four decimal places that is a single pip movement in the exchange rate in the market is worth 10 units of the quote currency given the lot size is one. A 10-pip movement in the market is worth 100 units of the quote currency whereas a 100-pip movement in the market comes to 1,000 units of quote currency and so on and so forth.

Profitability of Pips

Currency pair movement determines whether a trader made a loss or profit from his or her positions at the end of the trade. A trader who buys the EUR/USD profits if the Euro increases in value relative to the US Dollar. If the trader bought the Euro for 1.1835 and stopped the trade at 1.1901, they would make 66 pips on this trade.

Conclusion

Every Forex trader should take their time to learn and understand the basics of the business. This can help them avoid pitfalls and make some good money in the business. Forex Pips is one of the most important aspects of Forex trading as they form the basis of forex trading and would determine how much they would win or lose as every single unit movement either increases your profit or gain. Understanding pips helps you as a trader to maximize your profit when the opportunity is right while avoiding losses.