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  • Let’s Talk About Pips In Forex

    It’s time for us to do some simple mathematics.  You may have heard people using terms like “pips,” “pippettes,” and “lots” at some point, especially in forex business circles. We are going to explain them to you–what each of them means, and how you can calculate their values for a successful forex trading.

    Pay close attention to this information; it’s very vital for all forex traders.

    Don’t bother about trading forex until you know everything about pips and its value regarding profit and loss.  

    What for Christ sake is a Pip?

    A pip is that unit of measurement that tells the change in value between two currencies.

    Assuming GBP/USD moves from 1.1050 to 1.1051, the .0001 increase in value is ONE PIP.

    A pip is typically the last decimal position of a quotation.

    Most pairs reach up to 4 decimal places. However, there are some exceptions such as the Japanese yen pairs, which goes out to 2 decimal points.

    Alright: What is a Pipette?

    Some brokers in the market quote currency pairs far above the usual 4 and 2 decimal positions–going as far as 5 to 3 decimal places.

    When such brokers do this, they are practically quoting what we call “FRACTIONAL PIPs,” which are also called “Pipettes.”

    For example, if EUR/USD moves from 1.30543 to 1.30544, that .0001 USD higher movement is ONE PIP.

    How to calculate and derive the value of a pip

    I believe you know that every currency has its value in relation to others? Thus, it is essential to calculate the value of a pip for that particular currency.

    We are going to use a quote of 4 decimal places in the following example.

    For a better sense of clarity, we are going to be using ratio to express the exchange rates. That is, GBP/USD at 1.2400 will be written as “1 GBP/1.2400 USD.”

    Example #1: USD/CHF=1.0200

    To be written as 1 USD to 1.0200 CHF ( or 1 USD/1.0200 CHF)

    (the change of value in counter currency) multiply by the ratio of the exchange rate=pip value (regarding the base currency)

    {.0001 CHF} x {1 USD/1.0200 CHF}

    Or you can do it this way:

    [(.0001 CHF) / (1.0200 CHF)] x 1 USD=0.00009804 per Unit Traded.

    going by this example, assuming 10,000 units of USD/CHF is traded, then a one pipi change to the rate of exchange would amount to an approximate sum of .98 USD change in the value of the position (that is, 10,000 units x 0.0000984 USD /unit.)

    We call it “approximate” because the value of each pip moves as the exchange rate changes.

    Example #2: GBP/CAD=123.00

    Here we are using a currency pair with the Canadian dollar as the counter currency.

    Look closely, and you will notice that the currency pair above only reaches 2 decimal places to quantify a 1 pip change in value. Therefore, a ONE PIP move would produce .01 CAD.

    (the change of value in counter currency) multiply by the ratio of the exchange rate=pip value (regarding the base currency)

    {.0001 CAD} x {1 GBP/123.00 CHF}

    Or you can do it this way:

    [(.0001 CAD) / (123.00 CAD)] x 1 GBP = 0.0000813 GBP.

    So, assuming you will be trading 10,000 units of GBP/CAD, each value change in pip is approximately worth 0.813 GBP.

    How To Find The Value Of A Pip In Your Account Denomination

    When trying to sort out the pip value of your position, there is one last question to ask; “what is the pip value regarding my account currency?”

    Besides, it’s a global market, and it’s not all traders that have their accounts denominated with the same currency.

    What this implies is that the pip value in question must be translated into whatever currency for which your account is traded.

    Now, here is probably the most straightforward calculation to derive the answer; quickly get the “found pip value” and multiply/divide it by the exchange rate of the currency in your account and the other currency in question.

    If you go back to the GBP/CAD example above, the “found pip value” is 0.813; we can start by converting that to the pip value in JPY by using GBP/JPY at 1.5590 as the ratio of our exchange rate.

    If it happens that the currency you are about converting to is the exchange rate’s counter currency, then divide the “found pip value” by the ratio of the corresponding exchange rate. That is:

    .813 GBP per pip/(1 GBP/1.5590 JPY)

    You can also do it as:

    [(.813 GBP) / (1 GBP)] x (1.5590 JPY) = 1.2674 JPY per move.

    Therefore, for each .01 pip move in GBP/CAD, the value of 10,000 unit position will change approximately by 1.27 JPY.

    Assuming the currency you are planning to convert to is the base currency of the ratio of the exchange rate, then times the “found pip value” by the ratio of the conversion exchange rate.

    Using our USD/CHF example above, we are going to find the pip value of 98 USD in Australian Dollars (AUD). We will be using .7900 as the conversion exchange rate ratio.

    0.98 USD per pip x (1 AUD/.7900 USD)

    OR

    [(0.98 USD) / (.7900 USD)] x (1 AUD) = 1.2405 AUD per move.

    Therefore, for each .0001 pip move in USD/CHF, the value of 10,000 unit position will change approximately by 1.24 AUD.

    Although you are now versed in calculating pips values, you just might be wondering aloud; “Do I really need to work out all of these figures?”

    Well, since you want an answer, I’m telling you now that it’s big PHAT NO! The fact is, almost all the brokers in the market will be the ones doing this for you automatically. However, it is always a good thing if you know how they work.

    Nevertheless, if your broker, for whatsoever reason, refuse to do this for you, then relax–our “pip value calculator” is all yours to use. Isn’t that wonderful?

    In the next lesson, we are going to be looking at how this figures that look less important adds up.    

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