Pip
In finance, especially in Forex, a percentage in point (pip) is a unit of change in the exchange rate of a currency pair.
In other words, a pip is the smallest unit of price for a currency. It is the last decimal point in exchange rates or currency pairs.
The major currencies, except the Japanese yen, are priced to four decimal places. For these currencies, a pip is one unit of the fourth decimal point.
For the Japanese yen, a pip refers to one unit in the second decimal point because the yen is much closer in value to one-hundredth of other major currencies. It would be different for the other currencies.
If the currency pair of (EUR/USD) is traded at an exchange rate of 1.3000 (1 EUR = 1.3 USD), and the rate changes to 1.3010, the price ratio increases by 10 pips.
In this example, if a trader buys 5 standard lots (i.e. 5 x 100,000 = 500,000) of EUR/USD, paying USD 650,000 and closes the position after the 10 pips appreciation, the trader will receive USD 650,500 and achieve a profit of 500 US dollars (i.e. 500,000 (5 standard lots) x 0.0010 = USD 500).
As you may already know, the change in the value of one currency relative to another is measured in ‘pips,’ which represent a very small percentage of a unit of currency’s value.
To take advantage of this minute change in value, you need to trade large amounts of a particular currency to see any significant profit or loss.
Here are other examples for 1 standard lot (100,000 units) for calculating the value of a pip.
- USD/JPY at an exchange rate of 112.40 (.01 / 112.40) x 100,000 = $8.89 per pip
- USD/CHF at an exchange rate of 1.2666 (.0001 / 1.2666) x 100,000 = $7.89 per pip
In cases where the U.S. dollar is not the base currency, the formula is slightly different.
- EUR/USD at an exchange rate of 1.1290 (.0001 / 1.1290) X 100,000 = 8.85 x 1.1290 = $9.99165 per pip
- GBP/USD at an exchange rate of 1.7590 (.0001 / 1.7590) x 100,000 = 5.68 x 1.7590 = $9.99112 per pip
