In the forex industry, you must have heard of terms like pips, pipettes, pip value and lots. Well, to get started with trading in this market, understanding these terms are critical. So, in this article, we shall be discussing these terms in detail by taking some examples as well for your better understanding.
What is a pip?
A pip is a unit of measurement which determines the change in value between currencies. If you are into science, a pip is basically the least count of a currency. Let’s comprehend it practically by taking examples so some currencies.
Example 1: USD/CAD
Let’s say USD/CAD is trading at 1.3090. When the price rises from 1.3090 to 1.3091, we mean that the price has moved ONE PIP. In other words, every 0.0001 rise in CAD is one pip. However, this is not the case for all currencies.
So, a pip in simple terms is the last decimal place in the exchange rate. In the above the example, last decimal place moved by one unit (from 0 to 1), so, we say the price has moved one pip.
Similarly, if the price moves from 1.3090 to 1.3098, we say the prices have moved eight pips. And, a move from is 1.3090 to 1.3100 is a ten pip move.
Let’s assume that the current market price of USD/JPY is 108.60. So, when the price rises to 108.61, we say that the price has moved ONE PIP. Here we see that this example is different from the previous one. This is because, in JPY pairs, every 0.01 rise in JPY is called one pip.
Quick hack to remember the pip concept: Note that, for every currency pair that does not contain JPY as the counter currency, to determine one pip, consider the fourth decimal place. On the other hand, if the currency pair has JPY as the Quote currency, consider the second decimal place to determine one pip.
What is a pipette?
Every currency pair has either 4 or 2 decimal places. However, some brokers show 5 or 3 decimal places for the currency pairs, i.e., they display one extra decimal place. This additional decimal place is called a pipette. A pipette is one-tenth of a pip. This is why pipette is also called fractional pip.
For example, if the price of AUD/USD rises from 0.70600 to 0.70601, this 0.00001 rise is one pipette.
How to read pips
A self-explanatory figure to read pips is given below.
What is pip value and how to calculate it?
The pip value determines how much a pip is worth in terms of the base currency. Let us understand it with an example.
Example: Let’s say the price of USD/CHF is 0.9900. This can also be read as 1 USD to 0.9900 CHF, or 1 USD/0.9900 CHF. This ratio is the exchange rate ratio.
Pip value = the change in the counter currency * exchange rate ratio
So, the pip value for one pip can be calculated as,
Pip value = 0.0001 CHF * (1 USD/0.9900 CHF)
Rearranging and simplifying the terms:
=> (0.0001 CHF/ 0.9900 CHF) * 1 USD
=> 0.0001010 USD
So, if you trade 1 unit of USD/CHF, one pip will give you 0.0001010 US dollars.
Similarly, if you trade 10,000 units of USD/CHF, one pip will yield 1.01 US dollars.