Pip value definition

What is the pip value?

The pip value is the price attributed to a one-pip move in a forex trade – it is often used when referencing a position’s losses or gains. The meaning of pip value can vary between currencies, but as most major currency pairs are priced to four decimal places, a pip is usually equal to the fourth figure after the decimal point. In GBP/USD, for instance, 0.0001 is one pip.

Because pips are tiny in value, forex is traded in micro lots, mini lots and lots: 1000, 10,000 or 100,000 units of currency. Although the value of a pip isn’t that much, through leverage it can represent a significant exposure and can influence your open position considerably. 

The pip value is defined by the currency pair being traded, the size of the trade and the exchange rate of the currency pair. To calculate pip value, divide one pip (usually 0.0001) by the current market value of the forex pair. Then, multiply that figure by your lot size, which is the number of base units that you are trading. This means that the value of a pip will be different between currency pairs, due to the variations in exchange rates. However, when the quote currency is the US dollar, the value of a pip is always the same – if the lot size is 100,000, the pip will equal $10. 

Usually you will not have to calculate the value of a pip yourself, as your forex broker or provider will do it for you, but it is a useful process to familiarise yourself with.

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Example of pip value

Let’s say GBP/USD is currently trading at a market price of 1.5000, and you have a mini lot of 10,000. The value of a pip is calculated by:

(0.0001/1.5000) x 10,000 = 0.6666

This means that for every pip of movement, your trade would earn or lose 0.6666 pounds.

When trading spot forex, the pip value is usually defined by the quote currency, which is USD in this example. The calculation for the value of one pip of movement in the quote currency is:

10,000 x 0.0001 = 1

In this case, for every pip of movement, your trade would generate $1 of profit or loss. Alternatively, you could multiply your quote currency pip value by the current exchange rate of GBP/USD.

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