Forex Basic

Understanding pips and their impact on a forex trade

What is a Pip in Forex?

A pip, short for percentage in point or price interest point, is known to be the smallest numerical price move in the exchange market. When a price changes on the exchange it is generally referred to as a Pip/s or Pipette change. As most currency pairs are priced to 4 decimals places ($0.0001) the smallest change would be to the last number after the decimal point for example: $0.0001 which is illustrated as the one indicated on this example. The difference between a pip and pipette is simply a 5 decimal place and not 4 such as a pip.

For most pairs a pip is equivalent to 0.01% or 1/100th of one percent, this value is also commonly referred to as BPS. A basis point (BPS) refers to a common unit of measure for interest rates and of their financial percentages. One BPS is equal to 1/100th of 1% or 0.01% (0.0001) and denotes a percentage change in the exchange rate.

Calculating pip value and position size

As mentioned, a pip is equivalent to a change of 1 point in fourth decimal in the exchange rate of the currency pair. Keeping that in mind here is how we calculate a pip move as well as price moves in forex trading.

Calculating forex price moves

Now that we are clear on what a pip is let’s see how much money we can gain or lose for each movement.

The size of your position will influence this, with the same price movement in pips, larger positions will have greater monetary consequences on your balance.

This can be calculated very simply: Positions size   x    0.0001   =     Monetary value of a pip

Here is a quick example using the EUR/USD as we have above:

We open a position size of 10,000 units and calculate the pip value as follows: 10,000 (units) x 0.0001 (one pip) = $1 per pip.

When you open a position of BUY and the market acts in your favor every pip movement will earn you $1.00 and the visa versa is true if you SELL. If the markets are against your choice to either buy or sell, a $1.00 will be lost per pip movement should the trend be against you.

Increasing or decreasing the amount of units will have the exact effect on the pip value.

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