What is PIP? How to Calculate PIPS in Forex

If you’ve heard of Forex, chances are you’ve come across terms like “pip,” “lot,” or phrases such as taking profit at 100 pips, price drops by 50 pips, etc. So what exactly is a pip? And how is this knowledge applied in the Forex market? Today’s article will help you answer those questions.

1. WHAT IS A PIP?

Pip stands for Point in Percentage. Forex traders use this term as a unit of measurement for the smallest change between two currencies. Specifically, it refers to a one-unit change in the fourth decimal place in a Forex price quote.

For example, if the EUR/USD pair moves from 1.1402 to 1.1403, it means the price has moved one pip.

Below is an example of a price quote for the EUR/USD currency pair:

However, for the Japanese Yen, the pip is calculated from the second decimal place in the price quote, instead of the fourth decimal place like other currencies.

When trading a mini LOT (10,000) and a standard LOT (100,000) with the Japanese Yen, a 1 pip movement is worth 100 JPY and 1000 JPY, respectively.

2. HOW TO CALCULATE PIP IN FOREX

The value of a pip is calculated by multiplying 0.0001 (since it is calculated from the fourth decimal place) by a certain lot size/contract size. For a standard LOT, the size is 100,000 units of currency, and for a mini LOT, the size is 10,000 units of currency.

Example: For the EUR/USD pair, when trading a standard LOT, a 1 pip change corresponds to 0.0001 x 100,000 = $10.

By calculating the value of a pip, traders can estimate how much money they can earn or risk when executing a trade. Additionally, instead of analyzing just the pip value, they can also determine how their account equity changes.

However, it’s important to note that not all currencies have the same pip value because the pip value is expressed in the currency you’re trading, and it will vary when trading different currency pairs. For example, when trading EUR/USD, the pip value is expressed in USD, but when trading GBP/JPY, it may be in JPY.

2.1. Specific Example for the EUR/USD Pair

Remember that forex trading involves the amount of money you’re trading. Most brokers provide you with a standard contract or mini contract with the following specifications:

The value of one pip in forex for a standard EUR/USD contract is calculated as follows:

Pip Value = Contract Size x 1 pip
= 100,000 x 0.0001 = $10

So, for a 1 pip movement in the direction you want, you’ll earn $10; conversely, if the price moves against you, you’ll lose $10. Similarly, with a mini contract, for each 1 pip movement, you will earn or lose $1.

2.2. Converting the Value

If your account is denominated in British Pounds (GBP) and you want to convert $1 (the value of 1 pip in a standard EUR/USD lot) to GBP, you need to divide $1 by the GBP/USD exchange rate, which is assumed to be 1.2863 at the time of writing.

This means that the British Pound is approximately 1.2863 times stronger than the US Dollar, so you would get 0.7774 pounds. If you’re using an account with GBP as the base currency, each pip movement when trading 10,000 EUR/USD would earn or cost you around 0.7774 pounds.

2.3. What is a Point? How many points is 1 pip?

Another unit that traders use to measure the change in exchange rates of a currency pair is a point. While a pip is the change in the fourth decimal place (or second decimal place for JPY pairs), a point is the change in the fifth decimal place of the exchange rate.

The question is, how many points is 1 pip?

1 PIP = 10 POINTS

Or conversely, 1 point = 1/10 pip. Let’s look at an example below to better understand Points and Pips in forex.

Assume the current exchange rate for USDCHF is 0.92345, and the change in the fourth decimal place is the pip.

• If tomorrow the exchange rate rises to 0.92355, it means the exchange rate changed by 1 pip, which is equivalent to 10 points.

• If the exchange rate rises to 0.92785, it means the exchange rate increased by 44 pips (78 – 34) = 440 points.