What is a pip? How to calculate the value of pips in forex
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Pip stands for percentage in point, which is understood as a unit of measurement for the price movement of a certain financial instrument such as currency pairs, metals, indices, stocks…
Pip, along with spread, a lot are very basic but extremely important terms, forcing a trader to understand and grasp the essence when participating in the forex market. Whatever you do, such as placing orders, setting up trading strategies, researching the market, etc., is related to these terms.
Pip stands for percentage in point (percentage point) which is understood as a unit of measurement for the price movement of a certain financial instrument. In the forex market, financial instruments can be currency pairs, metals, indices, stocks, etc.
For currency pairs, pips measure the movement in the value of two currencies or, more precisely, the change in the exchange rate of that currency pair.
In the spot market, the rates of currency pairs are usually quoted to 4 decimal places, assuming the rate of EUR/USD increases from 1.2345 to 1.2346, we say that the rate of this pair increases to $0.0001 la. But in the forex market, the rate includes up to 5 decimal places, assuming the EUR/USD pair increases from 1.23456 to 1.23457, then we say the rate of EUR/USD increases to $0.00001. With written text, it seems to be quite long, but in speaking, it is still long. Therefore, the concept of pips was born to minimize this very small price movement.
What is a pip?
How to determine pips in forex
In the forex market, currency pairs that do not contain JPY are quoted to 5 decimal places, currency pairs containing JPY are quoted to 3 decimal places, gold (XAU/USD) is quoted to 2 decimal places, and the index is 2 decimal places…
Determine pips on currency pairs that do not contain JPY
The pip is determined from the place of the 4th decimal place in the rate.
For example, if the EUR/USD pair has a rate increase from 1.23456 to 1.23467, instead of saying the rate increased to $0.000011, we say the rate increased by 1.1 pips.
Determine pips on currency pairs containing JPY
The pip is determined from the place of the 2nd decimal in the rate.
For example, if the USD/JPY pair fell from 109.876 to 109.853, instead of saying the rate fell to 0.023, we would say the USD/JPY rate fell to 2.3 pips.
Identify pips on gold (XAU/USD)
Pip is determined from the place of the first decimal.
For example, if the gold rate changes from 1903.24 to 1903.89, we say the price of gold increased by 6.5 pips instead of saying the price of gold increased by $0.65/ounce.
How to calculate pips
How to calculate the value of pips in forex.
How much is 1 pip worth?
Before we get into the value of pips, let’s reiterate a little bit about what exchange rates mean.
The EUR/USD pair has an exchange rate of 1.23456, which means 1 EUR = 1.23456 USD. The first currency is the base currency and the second currency is the quote currency.
Similarly, the USD/CAD pair has an exchange rate of 1.20752, which means 1 USD = 1.20752 CAD.
For gold, the unit of gold is an ounce, the gold rate XAU/USD equals 1903.76 which means 1 ounce of gold = 1903.76 USD.
Case 1: For currency pairs with USD behind (XXX/USD): 1 pip = 0.0001 USD Consider the EUR/USD pair. Suppose, the current rate of EUR/USD is 1.23456, when we say this rate goes up by 1 pip, now the EUR/USD rate will change to 1.23466, that is, 1 EUR is initially equal to 1.23456 USD has now increased to 1.23466 USD, that is, increased to 1.23466 – 1.23456 = 0.0001 USD. Then 1 pip = 0.0001 USD.
Case 2: For currency pairs with USD preceded (USD/XXX): 1 pip = (0.0001/rate) USD
Consider the USD/CHF pair. With the same explanation as case 1, it is easy to deduce, that 1 pip = 0.0001 CHF. Our task is to take one more step to convert this 0.0001 CHF to USD.
Assume, the current rate of USD/CHF is 0.89920, i.e.:
1 USD = 0.89920 CHF, which
1 pip = 0.0001 CHF, then according to the rule of triangles, deduce: 1 pip = 0.0001/0.89920 USD = (0.0001/rate) USD
Case 3: For cross currency pairs (without USD)
Consider the EUR/GBP pair. Here, we have 2 ways to calculate
Method 1: calculate the pip value in the previous currency and then convert it to USD
This calculation requires one more parameter, which is the rate of the EUR/USD pair.
Let’s call it, the rate of EUR/GBP is the main rate and the rate of EUR/USD is the minor rate.
According to the results from case 2 then:
1 pip = (0.0001/main rate) EUR, which
1 EUR = USD sub-rate, deducing:
1 pip = [(0.0001/major rate)*minor rate] USD
But if the minor pair has USD in front then:
1 pip = [(0.0001/major rate)/minor rate] USD
Method 2: calculate the pip value in the currency behind and then convert it to USD
This way requires another parameter, which is the GBP/USD rate and we call this the secondary rate
According to the results from case 1 then:
1 pip = 0.0001 GBP, which
1 GBP = USD sub-rate, resulting in:
1 pip = (0.0001*sub-rate) USD
But if the minor pair has USD in front then: 1 pip = (0.0001/sub-rate) USD
Case 4: For currency pairs containing JPY (XXX/JPY)
If XXX is USD, then this case returns to the calculation of case 2 (the currency pair has USD in front), at this time, 1 pip = ( 0.01/rate) USD.
If XXX is not USD, it will refer to the calculation of case 3 (the cross-currency pair does not have USD). Assuming we calculate the pip value in the quote currency first and then convert to USD later and the minor currency pair has USD behind, then 1 pip = (0.01*sub-rate) USD.
Case 5: calculate the value of pips for gold (XAU/USD)
In this case, we will argue similar to case 1. The gold rate is 1903.76, which means 1 ounce of gold = 1903.76 USD. If we say gold goes up 1 pip then the rate will change to 1903.86, which means 1 ounce of gold now = 1903.86 USD. Gold price goes up to 0.1 USD/ounce, so 1 pip = 0.1 USD.
