What is Pip in Forex?
If you are into forex trading or just starting knowing about forex, then you must have heard the word Pip. It is one of the most important terms used in forex trading. But it is just not a term but also a significant factor and a number the most significant digit that can change the game of your trade.
Now, if you think what Pip is? Then you are reading the right article. We are going to tell you what is Pip in forex.
What is Pip in forex
The term pip, Elaborates to point in percentage. Pip refers to a small quantity of the change in a currency pair in terms of the forex market. In other words, a change in a pip is the slightest shift in price that an exchange rate can make based on the convention of the forex market.
A pip acts as the fundamental idea of foreign exchange (forex). The application of a forex pair is to distribute the exchange rate through bid and ask quotes that are usually four decimal places. In short, a forex trader buys and sells currencies comparing the price of one and the other.
Four decimal figures are the standard value to quote the price of a currency pair, but for Japanese yen, it is two decimal figures. The change in the lowest decimal figure of a price quote is the change in Pip. Therefore one Pip is equivalent to 0.01% or 1/100th of one percent
Let’s see an example of Pip
If the value of a currency pair EUR/USD is 1.1020 and the value increases to 1.1021, then that .0001 USD is the change in Pip since Pip is the fourth decimal number as mentioned above.
How to find pip amount in your account
If your currency pair is EUR/USD and you want to buy a lot. The cost of one lot is 100,000 EUR. 0.0001 is one Pip for EUR/USD. Then the currency value of one pip for one lot will be 100,000 x 0.0001 = $10. Therefore, we can determine that $10 is the profit or loss for this forex pair as per Pip.
Again if you buy the EUR/USD at 1.16670, later you decided to close your position by selling one lot at 1.16680. The difference between the two 1.16670 – 1.16680 = 0.00010. hence your profit will be 0.00010X100000= 10. That means 10 dollars is your profit.
How Pip works and profit calculation
For instance, a trader wants to purchase the currency pair USD/EUR. He is buying U.S. Dollars and, at the same time, selling Euro. Similarly, If a trader who wants to sell U.S. Dollars would sell the USD/EUR pair, purchase Euro simultaneously. Traders often use the word “pips” to mean the spread among the bid and ask prices of the currency pair and to show how much profit or loss can there be in a trade.
Suppose you have a currency pair USD/EUR with a quote of 0.7756. This indicates, US$1, can purchase nearly 0.7756 euros. For the rise of one Pip, the value will be 0.7757 in the quote. Therefore the price of the U.S. dollar would increase in comparison to the EURO. Therefore you can buy slightly more euros with 1USD.
The impact on the dollar for a single pip change, or value of Pip, is dependent on the amount of euros a trader buys. If the trader buy 100,000 EUR with USD, the paid price will be ([1/0.7756] x 100,000)= 128,932.44 USD. With the rais of only one Pip, the amount paid would be ([1/0.7757] x 100,000)= 128,915.82USD.
Therefore in a lot of 100,000 Euros, the pip value will be ($128,932.44 – $128,915.82)= 16.62USD. In another case, if the cost of your lot were 10,000 Euros where the initial price is the same, the pip value would be 1.6620USD.
Through this example, we can understand that the value of Pip rises along the change in the price of the purchased currency.
What is Pipettes
A pipette is one-tenth means 1/10 of pip brokers or traders quote the pair of currency beyond the standard value, from 4 or 2 decimal places the quote currency pairs in 5 or 3 decimal places, this fractional Pip is the pipette.
For example, USD/EUR is 1.33256 here, the fifth decimal place of the value, which is 6 is the pipette.
Trading in forex requires many calculations. Calculating the pip value is one of the essential factors for traders. The Pip determines whether you made profit or loss. Just not that studying the history and record of Pip fluctuation of any currency pair, a trader can have technical analysis and assume when to buy or sell. Minimal value can play a huge role in this market.