What Are Pips?

• Let’s start with the basics. In Forex trading, traders often use terminology which is specific to the industry. If you are new to Forex trading, you will often hear a conversation such as this:
• “I made 80 pips today.”
• “I am up by 50 pips so far.”
• So what does “pips” actually mean? The term “pip” is used to denote the term “percentage in point.” It is the standard term used to describe the smallest price fluctuation of a currency in relation to another currency. “Pips” should not be confused with the word “points” or “ticks.”

Value of a Pip

• As mentioned earlier, the pip is the smallest movement in the exchange rate of a currency pair. It is normally expressed as a change in the fourth digit to the right of the decimal point in a quoted rate. For example, let’s say that the EUR/USD is quoted at $1.3296. If the EUR/USD experienced an upward swing of 5 pips, the new rate will be $1.301 ($1.3296+$0.0005).
• Accordingly, the value of a pip is equal to 1/100 of a cent. Although this might seem small to you, take into consideration that Forex is normally traded in lots of $100,000. So a single pip would translate into a price difference of $10.
• Using the same example, let’s say you bought five (5) lots of EUR/USD at $1.3296 before the price rose to $1.3301. With an upward swing of five (5) pips in the exchange rate, you would have theoretically made a profit of $250 ($50 x 5 lots).

Pip Value for Japanese Yen Quotes

For currencies quoted in relation to the Japanese Yen, the exchange rate is quoted to two (2) decimal places only. This means that the value of each pip is 1 cent instead of 1/100 of a cent. If a EUR/JPY quote of 118.70 goes up by one pip, the new quote will be 118.71.

Relationship of Pips to Spreads

• Pips are important not only because they help traders determine how much money they have made, but also because they allow traders to determine the cost of their Forex transactions. In Forex, traders are not charged any commission by their brokers. Instead, traders have to pay for what is known as a “spread.”
• The spread is the difference between the selling and buying prices (Bid/Ask prices) of a currency pair. When you ask for a currency quote, you will be presented with two (2) prices:

  

Based on the quote given above, you will have to pay your broker $1.3296 for every Euro bought. On the other hand, if you want to sell the EUR/USD currency pair, you’ll only receive $1.3293 for every Euro sold. So instead of a commission, your broker is actually earning a spread of 3 pips. In other words, the 3 pips spread is the transactional cost of doing business with your broker. It is important to make sure that the broker you work with offers low spreads. You can look at our spreads here.

• Usually, currencies that are actively traded have lower spreads than exotic currencies, the latter of which are less frequently traded.

“Cross Currencies Pip Value”

• Earlier, we used the EUR/USD currency pair to calculating pip value, assuming that our trading account is denominated in US Dollars. As the Forex trading community is a global one, it is not surprising to find trading accounts denominated in other currencies. This means we have to translate the value of the pip to whatever currency our trading account is denominated in.
• In our EUR/USD currency pair examples, the value of a pip (per lot traded) was $10. Let’s assume that our trading account is denominated in British pounds (GBP). In order to get the value of the pip in GBP, simply divide the “found pip value” ($10) by the exchange rate for the GBP/USD.
• For example:
• Assuming the GBP/USD is quoted at 1.5590, the “found pip value” of $10 in GBP is:
• 10/1.5590 = 6.4143
• In other words, a single pip price movement in our EUR/USD quote is valued at 6.4143 GBP.
• You’re probably wondering if you’ll have to make these calculations often. The answer is NO. Your broker will normally calculate this for you. Nevertheless, it never hurts to know how these figures are arrived at.

Pipettes

Earlier, we also mentioned that currencies are quoted to four (4) decimal places (with the exception of the Yen). However, there are brokers who provide quotes at five (5) and three (3) decimal places. For example the EUR/USD could be quoted by some brokers at 1.32967 instead of the standard 1.3296. This is known as quoting in “fractional pips.” The smallest price movement for fractional pips is known as a “Pipette” (you won’t see this often).