Pip is the smallest price movement unit for a currency pair.
Pip is the short form of “percentage in point” or “price interest point.” Traders use pips to calculate the gains or losses in a trade.
Pip is calculated from the and last decimal point, and it tells you the amount of change in the exchange rate for a currency pair. Most of the currency pairs are priced to 4 decimal points. The smallest change of the last decimal point is equivalent to 1/100 of 1%, one basis point. In the other words, a pip is equivalent to 1 basis point.
If currency pairs displayed to 4 decimal places, then 1 pip = 0.0001
For Yen-based currency pairs, it’s different. Yen-based currencies are displayed only 2 decimal points (0.01)
- Pip is the most basic unit for trading
- Though pip is the smallest amount of price change in forex trading; in heavily leverage trading a single pip difference can cause a significant profit or loss.
- Pip is calculated from the last decimal point of the quoted price
Calculation of Pips
Assume that the quote price of EURUSD is 1.1738. It means for 1 Euro you can buy US $1.1738. If there is a 10 pips increase in price the quote price will become 1.1748. It will increase the value of the EURO against US dollars, and you will get more dollars by selling euros.
You made a $100,000 trade on EURUSD pair. Your trade closed at 1.1748, and you gained 10 pips. Now we will calculate your 10 pips profit in US dollars.
Step 1: The profit for 1 pip gain will be 100,000 X 0.0001 = 10 USD
step 2: The profit for 10 pips gain will be 10 x 10 = 100 USD
To get more tighter spreads, some broker allows fractional pip. It allows the broker to quote the currency price up to 5 decimal points, like 1.17380. A fractional pip also known as pipette is the one-tenth (1/10) of a pip. In yen based currency pairs this system allows the broker to quote the currency price up to 3 decimal points.