what is a “PIP” in Forex Trading?

PIP in Forex Trading:

We have been using the term PIP. PIP is “Price Index Point” or “Price Interest Point”. But what exactly does it mean? Most of the currency pairs exchange rate is represented as X.XXXX (Four decimal currency pairs). That means there will be four digits after the decimal point. We can say that the change in one point in the fourth decimal point can be said as on pip.

Calculating the pips – Four Decimal Currency Pairs:

For example, take the currency pair EURUSD. The exchange rate is 1.4530. Because of the currency fluctuations lets the exchange rate changed to 1.4531. The difference is 0.0001. The change in the fourth decimal point is 1. This is called 1 pip for these currency pairs.

Calculating the pips – Two Decimal Currency Pairs:

But some currency pairs will have only two digits after the decimal point. For these currency pairs one point change in the second digit after the decimal point is called one pip.

For example take the currency pair USDJPY. Lets say the exchange rate is 90.27. Because of the currency fluctuations the exchange rate changed to 90.28. The difference is 0.01. The change in the second digit is one point which is one pip for these currency pairs.

Calculating the pips more easily:

How to calculate the pips more easily. If the currency pair has four digits after the decimal point multiply it with 10,000 then get the difference which is nothing but the pips.

Lets say the EURUSD exchange rate is 1.4534. Multiply it by 10,000 and it becomes 14534. Lets say because of the currency fluctuations the exchange rate changed to 1.4634. Multiply it by 10,000 and it becomes 14634. The difference is 14634 – 14534 which is 100 which is nothing but 100 pips. So we can say that the EURUSD currency pair has increased in 100 pips.

Lets say the GBPUSD exchange rate is 1.7691. Multiply it by 10,000 and it becomes 17691. Lets say because of the currency fluctuations the exchange rate changed to 1.7591. Multiply it by 10,000 and it becomes 17591. The difference is 17591 – 17691 which is -100 which is nothing but 100 pips. So we can say that the currency pair has decreased in 100 pips.

The currency pairs like USDJPY, CADJPY etc have only two digits after the decimal point. For these currency pairs use 100 to multiply and take the difference and you will get the number of pips.

If you are using the meta trader platform it is very easy for you to see the number of pips difference on the charts. Select the crosshair  tool. At one point on the chart click the mouse and drag it. It will show you the number of pips difference. Check the following picture.

Checking The Number Of Pips Using Crosshair Tool In Metatrade

Value of Each Pip:

But what exactly is the value of each pip? This differs for each currency pair. Generally the value of each pip depends on the following.

• Lot Size
• Number of Lots
• Pip Size

PIP Value = Lot Size X Number of Lots  X PIP Size

Example – EURUSD:

Lets calculate the pip value for EURUSD for 1 Standard Lot with a leverage of 1:100.

PIP Value = 100,000[Lot Size for 1:100 leverage] X 1[Number of Lots] X 0.0001[PIP Size] = 10 Dollars

So for one standard lot with a leverage of 1:100, if you get 1 pip profit means you get a profit of $10.

Lets calculate the pip value for EURUSD for 1 Standard Lot with a leverage of 1:400. For 1:400 leverage the lot size will be 400,000.

So the PIP value is

PIP Value = 400,000[Lot Size for 1:400 leverage] X 1[Number of Lots] X 0.0001[PIP Size] = 40 Dollars

So with more leverage the pip value increases. Thats why its more profitable at the same time it is more risky also.

Example – EURGBP:

Lets calculate it for another pair EURGBP for 1 standard lot with a leverage of 1:100.

PIP Value = 100,000[Lot Size for 1:100 leverage] X 1[Number of Lots] X 0.0001[PIP Size] = 10 British Pounds.

But this has to be converted into dollars. Lets say the current exchange rate is 1.5430. So this will be 10 X 1.5430 = $15.34. So for this currency pair each pip will be $15.34.

For mini lots with a leverage of 1:100 the lot size will be 10,000 and you can calculate the pip value as above.