What Is A Pip?
You will have probably heard of the terms pip in trading forex, but do you know exactly what it refers to? This term is commonly used in forex and it is essential that you know what it is and how it is worked out. The reason that this is so important is because this is how you work out your trade size, profits and losses. The basic rule is don’t even think about trading until you are clear with pip values and calculating profit and loss.
What is a pip?
This is the change in value between two currencies. The pip is the smallest price change that an asset can make. The majority of currency pairs are quoted to 4 decimal places, so a change of 0.0001 equates to a 1 pip movement.
So, if the EUR/USD was trading at 1.2450 and the price moved to 1.2451 this would be a one pip move. Alternatively, if the EUR/USD trades at 1.2450 and the price moves to 1.2470 this would represent a move of 20 pips.
Note that the Japanese Yen will trade to just 2 decimal places. So a change of 0.01 would equate to a one pip movement. In this case the USD/JPY is trading at 105.50, if it moves to 105.51 this is equivalent to a one pip move. Meanwhile 105.50 moving to 105.70 would represent at 20 pip move.
How to calculate the value of a pip?
So now we n=know what a pip is, we also want to be able to calculate the value of a pip. This will enable you to be able to calculate your profit and loss, however this also depends on the size of your trade. Larger positions mean that each pip movement will have a bigger monetary consequence.
So, in order to work this out we consider:
Position size x 0.0001 = monetary value of 1 pip.
In other words, this is the amount that we would make or lose for each pip movement.
10,000 x 0.0001 = 1
So, in the EUR/USD for each 1 pip movement we would make or lose $1. If EUR/USD moves 50 points in our favour, we would make $50.
The same calculation is relevant for different trade sizes:
5000 x 0.0001 = $0.5 per pip movement
50,000 x 0.0001 = $5 per pip movement
A key point here is that the pip value is always measured in the quote currency of the pair. This is the currency of the right hand side. So, whilst pip movements in EUR/USD is always measured in $, pip movement in EUR/GBP will always be measured in pound sterling.
Vantage FX provides a comprehensive educational package to its clients. This includes articles, webinars and seminars, details of which can be found on the website. Make sure that you make the most of these resources and that you understand the basics before you start trading. This will go a long way to helping you on your path to profitable trading.