Pip (also called point) is the minimum price movement in Forex. We know that when trading in the forex market a trader chooses a currency pair in which one currency is sold and another is bought and then the trader earns on the difference in prices.
So when the value of the currency changes, the amount after the change occurred is called a pip (point).
Let’s look at this with an example. Suppose we trade the currency pair EUR / USD, the current rate is 1.3519. We predicted that there will be a growth and opened a buy position. Our prediction was correct, the rate grew and reached 1.3520. Here is a price change, up to the fourth digit after the decimal point (0.0001), called a pip / point.
How do we calculate the value of a pip?
In Forex transactions it is important to predict the gain or loss that the trader is willing to bet on, not only in points (pips), but also be able to translate these items into the cash equivalent.
The cost of a pip depends on the currency pair and the transaction amount.
For all currency pairs (except Japanese Yen) a pip is 0.0001. (For Yen, the value is 0.01.)
Now let’s go back to our example with the currency pair EUR / USD and calculate the value of 1 pip. We already know that trading in the Forex market is in contracts (lots) and one standard lot is $ 100,000.
Suppose we were to deal with a standard lot, and to calculate the value of one pip, we need 100,000 multiplied by the amount of pips, ie at 0.0001 and as a result we find that the value of one point will be 10 dollars.
Here is another example of how to calculate the value of 1 Pip for one 10k lot of CHF/USD where the base currency of the account is USD.
- Start with 10,000. Multiply 10,000 by .0001 since 1/10,000th is a pip for all pairs (except JPY pairs). 10,000* .0001 = 1.
- You now know each pip is worth 1 USD. That will be valued in the “counter currency” (second currency) of the pair.
- In this example, we are using the CHF/USD, so USD is the counter currency of the pair. Here, 1 pip is worth 1 USD dollar for 1 – 10k lot of EUR/USD.
So now you know exactly what is a pip in Forex. If you’d like to learn more, please take a look at our Forex Education Section.