In your quest to understand Forex trading you might have come across the words “pips” and “pipettes“. This lesson will help you understand what these terms mean.
You should try to understand this because it is essential for anyone trading forex to know this information. Don’t start trading forex without knowledge of pip values and calculating profit and loss.
The unit of measurement used to express the change in value between two currencies is referred to as a “Pip”. If GBP/USD changes from 1.4370 to 1.4371, that is a movement of ONE PIP upwards. A pip is the last decimal place of a currency quote. In a standard quotation, there are four decimal places except pairs that include the Japanese yen, in which case the quote will be given in two decimal places.
Some brokers will quote currency pairs in 5 decimal places and 3 decimal places for the yen pairs. These are known as Fractional Pips, aka pipettes. So if EUR/USD changes from 1.34789 to 1.34790, it has moved one pipette.
We will use four decimal place quotes to show how to calculate pip values in the examples below. In currency pairs where the USD is the base currency, this is how you calculate:
- USD/CHF at 1.4620
.0001 divided by the exchange rate =pip value
0.0001 / 1.4620 = 0.0000684
- USD/CAD at 1.3560
0.0001 divided by exchange rate = pip value
0.0001 / 1.3560 = 0.0000737
- USD/JPY at 117.50
As this currency pair only has two decimal places, then 1 pip will equal o.o1 devided by exchange rate = pip value
o.o1 / 117.50 = 0.0000851
If the USD is not the base currency (that is not quoted first) and we want to get the USD value, then we’ll have to add one more process.
- EUR/USD at 1.3230
0.0001 / exchange rate = pip value
o.ooo1 / 1.3230 = 0000756
However, we want to get the USD value so we make one more calcuation which is
EUR x Exchange rate
0.0000756 x 1.3230 = 0.0001
You do the same for other currency pairs where the USD is not the base currency in the quote. You however, won’t have to work all this out yourself. Most brokers will automatically calculate this for you with their trading platform.