What is a pip in forex trading?
A pip is the unit of measurement used to denote a change in a currency pair’s value. Learn more about pips in forex trading, including how they differ to other units of change in forex pair values – like pipettes.
How do pips work?
For most currency pairs, a pip represents a one digit change in price at the fourth decimal place. For JPY crosses, however, it’s a change at the second decimal. Pip stands for ‘point in percentage’ which represents a movement equivalent to one hundredth of 1%.
So, for EUR/USD with a quote price of $1.4527, a movement on the fourth decimal point would constitute a pip movement. If the quote for the EUR/USD pair changed to $1.4528, then there has been an increase of one pip.
This gain would indicate that USD is weakening relative to EUR because more USD is required to buy a single EUR. In this scenario, USD is the quote currency and EUR is the base. For reference, the quote currency is the currency in which the price for a forex pair is given, and the base always represents one. So, a quote price of $1.4527 on the EUR/USD pair means it would cost $1.4527 to buy a single euro.
Alternatively, if we’re looking at the USD/JPY currency pair, then its quote would look something like ¥147.89. In this case, a movement at the second decimal place would constituent a pip movement. If it decreased to ¥147.88, then there has been a decrease of one pip – indicating that JPY is strengthening relative to USD. That’s because it would now cost fewer JPY to buy one single USD.
What is the pip value?
The pip value is simply the change in value of a currency pair given a one-pip move in the currency pair’s price. A few things will determine pip movements, including:
- The volatility of the currency pair being traded
- The size of the position
- The currency pair’s current market price (exchange rate)
How to calculate the pip value of your forex trades
The pip value helps to determine your potential profit or loss per pip of movement in a currency pair’s price. The process for calculating pip value depends on how you’re trading:
- For CFDs, you want to multiply one pip (0.0001) by the position size
- For spread bets, you just need to know how much you’re betting per point of movement
So, when trading CFDs, the profit/loss per pip of movement is 0.0001 multiplied by 10,000 units of the base currency for mini lots, or 0.0001 multiplied by 100,000 units of the base currency for standard lots. Taking a standard lot of EUR/USD as an example, a single pip of movement is worth €10.
For spread bets, your pip value is determined by the amount of money that you’ve placed for every point of movement in a currency pair’s price – which is how spread bets work anyway.
Differences between a pip and a pipette
A pipette is another unit of measurement for a forex pair’s value. But rather than being the fourth decimal place (or second in JPY crosses), pipettes are a movement at the fifth decimal place. For JPY crosses, a movement at the third decimal place represents a pipette.
For example, if the EUR/USD currency pair’s quote changed to $1.45276 from $1.45272, there has been a positive increase of four pipettes.
How to trade forex
- Create or log in to your trading account
- Find the pair you want to take a position on
- Decide whether to go long to buy or short to sell
- Confirm your deal size
- Open and monitor your position
When you trade with us, you’ll be able to use spread bets and CFDs to go long or short on a currency pair’s price. Going long means that you’re speculating that the pair will increase in value, meaning that the quote is weakening against the base. Going short means that you’re speculating that the pair will decrease in value, meaning that the quote is strengthening against the base.
What to bear in mind before trading forex
Before trading forex, you should be aware that the market is susceptible to high levels of volatility and as a result a currency pair might experience a price movement of several pips in a very short space of time.
As a result, you should carry out both technical and fundamental analysis on the currency pair you want to trade before you open a position. We also offer educational resources like IG Academy to help you understand trading and get comfortable with the risks.
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