Forex Definition What s A Pip

Author : Ian Armstrong

Everything revolves around pips if you are a Forex trader This strange sounding acronym will indeed become the central fulcrum of your life for a few months while you learn your way around the forex industry

“I made a 130 pip profit on my last trade ”

“I am up 24 pips today ”

That sounds good but what is a pip exactly?

Pip stands for “percentage in point” and you might sometimes hear people talking about “points” rather than “pips” A pip is the smallest unit of price for any given currency It is the final decimal point in every currency pair or exchange rate

For a lot of currencies, the pip is 0 0001 If you were to buy USD/CHF at 1 2475 and then you sold it at 1 2489, you would have made 14 pips

One exception to this rule is USD/JPY There are only 2 decimal places in this currency pair, so the pip in this case equals 0 01

Pips are useful because they are the basis for calculating loss or profit

Pip Value

How do you know what a pip is worth with lots of different currency pairs to deal with and their prices moving up and down all the time?

It is actually quite simple If USD is the base currency in your currency pair, divide a pip (normally 0 0001) by the exchange rate If USD is the quote currency in your currency pair, it is easier still The pip value is always one pip (so 0 0001 for example)

Let’s say the exchange rate for USD/CHF is 1 2489,

0 0001 / 1 2489 = 0 0000800704

That seems like a very small figure but you need to remember that in Forex trading you can leverage small amounts of money to move large currency amounts You can use leverage to make a big profit from what appears to be a very small number

Let’s look at another example Your broker lets you trade with a 100:1 leverage This means that to buy a standard lot of $100,000 it will only cost you $1,000 You can see how trading in larger lots affects your profit and loss by affecting the value of the pip

If you are trading $1,000 in currency, you can calculate the pip value as follows:

0 0000800704 X 1000 = $0 08 per pip

The price would need to rise by a lot of pips to make any profit at that rate The 14 pip profit here only made you $1 12 But if you can use leverage to buy a lot size of $100,000, your profit will increase

0 0000800704 X 100,000 = $8 01 per pip

Now you have a profit of $112 14, which is obviously a great improvement!

Ian Armstrong is an avid Forex enthusiast.

Ian strongly suggests that beginners download the beginner’s guide to Forex trading (free), at Essential: Forex For Beginners

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