Point in Percentage (PIP) represents a change in the price of a currency pair due to exchange rates. A pip denotes to a fourth decimal in the amount of a currency. One pip symbolizes as 0.0001. Normally, currency pairs make an exhibition of four decimal places while only in the case of the Japanese yen currency pair shows just two decimals. PIP sometimes also called Price Interest Point (PIP).
For example, one pip is represented as 0.0001, two pips equal to 0.0002 and so on. A four pip spread for USD/CAD currency pair = 1.2350 / 1.2354
The placement of the fifth decimal after the point is known as a fractional pip (or point). It shows more exact signals of price movement and is a standard among good brokers.
Importance of Forex Pip
Forex Pip represents a price movement relating to currency pairs, thus gives an indication of price trend relating to a pair of currency.
Forex Pip describes the level of price volatility of the underlying pair.
The increase or decrease in a single pip helps in measuring its influence on the profitability.
Fractional pips (points) usually offer more accurate and tighter spread.
Forex Pips and especially fractional pips provide a supreme degree of liquidity; traders can efficiently manage the risk of serious deviations in price.
Forex Pip / fractional pips facilitate a more competitive forex trading environment.
How to work with a forex pip and how to calculate profit/loss from a trade?
A Pip can be calculated in terms of the underlie currency or quote. Pip stands for a small and uniform fluctuation in a quote currency and normally refers to one basis unit i.e. 1/100th of 1%. It used as a unit to calculate profit or loss in the relevant currency pair trading. Each pip has a monetary value and can be calculated as follows:
PIP VALUE = (Pip in decimal, i.e. 0.0001 x Total Trade Amount) ÷ Closing Price of the pair
Example Currency Pair = EUR/USD
Closing Price of Pair = 1.2345 after gaining the 18 pips that mean 1 EUR = 1.2345 USD
Trading Amount = 150,000 EUR (1,5 standard lots)
For calculating the pip value and determining the profit or loss in EUR steps are as under;
Pip Value = (0.0001 x 150,000) ÷ 1.2345 = 12.15
Trade Profit / (Loss) = 18 pips x 12.15 value of a pip = 218.7 EUR
The manual pip value calculation as explained above will most probably be quite impractical as you need to take fast trade decisions. Alternatively, you can use the Position Size Calculator below that will do all for you automatically.
High Risk Warning: Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.
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