Pip and Pipettes
This is the time to do a little math. I know many people don’t like this, but you will surely love this subject when it comes to trading forex. You’ve probably heard of the common terms such as “pips”, “pipettes,” and “lots” thrown around, and here we’re going to explain what they are and show you how their values are calculated.
In this lesson, I would like you to take your time understanding the information. You need to know and learn this by heart because this is very important for every forex trader. It is very imperative not to trade until you are comfortable with the pip values and calculating profit and loss.
Now, what is a pip? How about a Pipette?
A “Pip” is a unit of measurement to express the change in value between two currencies. Let’s take this one as a simple example, if EUR/USD moves from 1.2250 to 1.2251, the .0001 difference is ONE PIP. The last decimal place of a quotation is usually considered to be a pip. However, you have to remember that most pairs go out to 4 decimals, except some currencies like Japanese yen, which goes out to 2 decimal places.
A Pip to Remember:
There are some brokers that quote currency pairs beyond the standard “2 and 4″decimal places to “3 to 5″decimal places. Pipettes is a term used to describe fractional pips. For instance, if GBP/USD moves from 1.51542 to 1.51543, that .00001 USD move higher is ONE PIPETTE.
Each currency has its own relative values, thus it is essential to compute the value of a pip for that specific currency pair. In the next presentation, we will be using a 4 decimal places quote.
To better understand the calculations and computations, we are going to express the exchange rates will be as a ratio (i.e., EUR/USD at 1.2500 will be written as “1 EUR/ 1.2500 USD”).
Exchange rate ratio : USD/CAD = 1.0200. To be expressed as 1 USD to 1.0200 CAD (or 1 USD/1.0200 CAD)
(The value change in counter currency) times the exchange rate ratio = pip value
[.0001 CAD] x [1 USD/1.0200 CAD]
[(.0001 CAD) / (1.0200 CAD)] x 1 USD = 0.00009804 USD per unit traded
Using the example given above, if we traded 10,000 units of USD/CAD, then a one pip alteration to the exchange rate would be about a 0.98 USD change in the value position, that’s, 10,000 units x 0.0000984 USD/unit. Always remember that the exchange rate changes, as well as the movement of each pip.
Finding the Pip Value in your Account Denomination
One of the most common questions that a market player asks when figuring out the pip value of a position is, “What is the pip value when I am referring to my account currency?”Forex is a global market, thus not everyone has their account denominated in the same currency. This only means that the value of the pip will have to be converted to whatever currency our account may be traded in.
The process of computation is probably the easiest of all; multiplying and dividing the “found value of pip” by the exchange rate of your account currency and the currency in question is simple.
Let’s take this as an example:
First, let us convert the found pip value of 0913 GBP to the pip Value in USD by using the GBP/USD at 1.5590 as our exchange rate ratio. If you are converting a counter currency of the exchange rate, all you need to do is divide the “found pip value” by the corresponding rate ratio:
.813 GBP per pip / (1 GBP/1.5590 USD)
[(.813 GBP) / (1 GBP)] x (1.5590 USD) = 1.2674 USD per pip move
Therefore, fore every 0.01 pip move in GBP/JPY, the 10,000 value unit position changes by about 1.27 USD.
Furthermore, if the currency you are converting to is the base currency of the conversion exchange ratio, then the “found pip value” should be multiplied by the conversion rate ratio.
0.98 USD per pip X (1 NZD/.7900 USD)
In this kind of computation, you don’t need to be a math genius, at least when it comes to pip values. I know you have a question running in your mind. Maybe you are asking, “Do I really need to do and work all this out?” Well, the simple yet very powerful answer is NO. Nearly almost all forex brokers will work these things out for you automatically. However, as a market player it is a good idea to know, learn and understand how these things work for you.
You can always use a Pip Value Calculator available over the internet world.
In the next lesson, you will surely learn how to add up to these seemingly insignificant amounts.
Proceed to the Next Lesson: Lots, Leverage, and Profit and Loss
Go Back to the Previous Lesson: Time To Make Some Money in Trading Forex
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