What are pips and how they work?

A pip, that stands for Point in Percentage, is the unit of measure used by Forex traders to define the smallest change in value between two currencies. This is represented by a single digit move in the fourth decimal place in a typical forex quote.

For example, if the price of EUR/USD moves from 1.1402 to 1.1403, it’s considered a one pip or ‘point’ movement.

If you want to know how to measure them, there are two main formulas you can use for that:

The first formula is mainly used for most currency pairs. It uses the fourth number after the decimal to determine the pip. So, if the difference between prices is 0.0002, the trader will have generated 2 pips.

The second formula is used for those pairs that use Japanese yen as a base currency. The change in, say, the USD/JPY pair is so rapid that the above-mentioned method would generate thousands of pips. Instead, the industry has established an alternative method that uses the second number after the decimal point to determine a pip. So, if the difference is 0.04, a trader will get 4 pips.

How to calculate the value of a pip?

Traders can know the value of a pip by multiplying one pip (0.0001) by the specific lot/contract size. For standard lots this entails 100,000 units of the base currency and for mini lots, this is 10,000 units. For example, looking at EUR/USD, a one pip movement in a standard contract is equal to $10 (0.0001 x 100 000).

Being able to calculate the value of a single pip, helps Forex traders put a monetary value to their take profit targets and stop loss levels. Instead of simply analysing movements in pips, Forex traders can determine how the value of their trading account will fluctuate as the currency market moves.

It’s important to note that the value of one pip will differ for different currency pairs. This is because the value of one pip will always be shown in the currency of the quote/variable currency and this will differ when trading different currency pairs

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