What is a pip in Forex?

Pip is the smallest unit to express changes in the value of two currencies. Let us understand the concept of pip and how to calculate it with examples.

One of the most important steps of a Forex Trading Career is to get yourself well versed with the complex trading terminologies. In this article, we will understand the concept of the most confusing term, ‘Pip in Forex’, with examples.

Definition of pip in forex

In the foreign exchange market, tiny changes take place in the value of currencies in seconds or minutes. These small changes are represented in pips.

Percentage in point or Pip is the smallest unit to express changes in the value of two currencies or the exchange rate of a currency pair.

Key Features

Pip plays a crucial role in determining the profit or loss from a trade.
One Pip equals one Basis point or one-hundredth of one per cent ( 1/100 of 1% = 0.0001).
Pip is the 4 decimal places in most currency pairs. However, in the currency pair consisting of the Japanese Yen, it is the second decimal place.
When the changes in currency pair occur beyond the standard 4 and 2 decimal to 5 and 3 decimal places, it is known as Pipettes or Fractional Pips in Forex.
One pipette is equal to a tenth of a pip.

How to calculate pips in Forex

We have understood pip meaning forex. However, calculating pip can be quite a complex process for novice traders.

Before moving to the example, let us learn how to determine Pip value. Let us take the trade entry price 1.14456 of a non-JPY pair and understand pip value determination with different exit prices.

Now, let us understand the practical concept of pips forex with different currency pair examples to determine profit or loss from a trade.

Suppose a trader bought the currency pair EUR/USD at 1.1154 and sold at 1.1254.

Pip calculating with a non-JPY pair is quite easy. However, when it comes to JPY pairs, traders tend to get confused in pip calculations. So, let us look at the USD/JPY example.

With the Japanese pair, pip is the second value after decimal. Suppose a trader Bought USD/JPY at 145.20 and sold it at 145.70.

That is how pip is calculated in currency trading. Many traders use the Pip calculator to find out the profit or loss from trades. However, remember the accuracy of data is very important; otherwise, the whole result may be affected.

Importance of Pips in Forex

Selecting a currency pair

Choosing the right financial instrument to trade in is the most complex task in trading. Pip is one of the important factors to consider for identifying the currency pair.

The pip value of a highly volatile currency pair is also high. So, a trader can compare the price fluctuation of different currency pairs and select the best.

Determining Pivot Points

Pips help traders position the trade and identify important points like entry, exit, stop loss, and take profit.

A trader can set the stop loss and take profit points considering the number of pips they can afford to lose to earn the specific amount. In addition to this, it also helps the trader in maintaining the risk-to-reward ratio.

Formulate Trading Strategies

Understanding the concept of pips foreign exchange is a must to determine your trading plan. The value of pip has a significant impact on your strategy choice.

Day traders or scalpers take advantage of short-term price movements, while swing or position traders rely on long-term movements. Knowledge of pip enables a trader to select and formulate an effective trade strategy.

Identification of profit or loss

Pip is important to determine the profit or loss from a trade. It also helps brokers to set the spreads of a particular currency pair.

You may have seen charts or technical analysis indicators with expected profit or pips from a trade. That’s where the knowledge of pips trading will help you. You can identify potential trading opportunities considering your expectations from the market.

Final Words

Pips in forex play a crucial role in selecting currency pairs, identifying trading strategies, risk management, positioning trade, and making informed decisions.

Beginners or novice traders may find pip calculation a complex process. However, once you put the habit of calculating pip for all trades, you will not require any calculator or software to calculate the pip value.

Remember, the theoretical understanding of pip is not enough. Pip is among the most important factors a trader should consider. So, a trader should use pip while framing the trading plan to maximize the returns and eliminate the chances of losses.