Chapter 2: Currency Basics
A Pip (short for "percentage in point") is the smallest standard unit of price movement in a currency pair. It measures the change in value between two currencies and is essential for calculating profits and losses in forex trading.
How Pips Are Measured
Most currency pairs are quoted to four decimal places, and a pip represents a one digit movement in the fourth decimal place.
Example:
If EUR/USD moves from 1.2000 to 1.2001, that is a one-pip movement (0.0001).
The exception is currency pairs involving the Japanese yen (JPY), which are typically quoted to two decimal places, meaning a pip is a one digit movement in the second decimal place.
Example:
If USD/JPY moves from 130.50 to 130.51, that is a one pip movement (0.01).
How to Calculate Pip Value
To determine the monetary value of a pip, you need to consider:
The currency pair you’re trading.
The position size (number of units traded)
The pip value for that currency pair.
Example Calculation:
You are trading EUR/USD with a position size of 10,000 units (1 micro lot).
A one pip movement in EUR/USD (0.0001) is worth $1 per pip when trading a 10,000 unit position.
If the price moves 10 pips in your favor, you gain $10. If it moves 10 pips against you, you lose $10.
For standard lots (100,000 units), the pip value is $10 per pip, and for mini lots (10,000 units), it is $1 per pip in USD quoted pairs.
Pip Value in Non USD Quote Pairs
For currency pairs where the quote currency is not the U.S. dollar (such as EUR/GBP or GBP/JPY), the pip value varies based on the exchange rate.
Example:
If trading EUR/GBP, a one pip movement may not equal exactly $1 per micro lot because the quote currency is GBP, not USD.
To find the pip value in USD, you would multiply the pip value by the current exchange rate of GBP/USD to convert it into dollars.
Understanding pip values is essential for accurate risk management, as it allows traders to calculate potential profits and losses based on their position size and chosen currency pair.