What is a pip in forex?
Pip is the profit loss counting scale or unit in forex. The measurement of profit loss gets counted in forex in terms of pip or pipette.
For example, if EUR/USD quotes 1.1350 and market value increased to 1.1351, then the change pf 0.0001 means 1 pip.
The value of pip differs with the brokerage instruments 4 digits or 5 digits decimal point count (in case of EURUSD). In case of USDJPY its 3 digits vs 2 digits, 120.56 vs 120.567.
Four digits forex brokers:
4 Digit brokerage account means the broker will quote the EUR/USD as 1.1350. You can see the number there are 4 digits after the decimal point.
Generally, most of the market makers are having 4 digits or 2 digits quotations as they processed the price and pick a better price for you from their dealing desk. (Learn more from chapter 10)
Five digits forex brokers:
It means the broker will quote the EUR/USD as 1.13506. You can see the number there are 5 digits after the decimal point. They will also quote USDJPY in 3 digits after the decimal points as stated above.
Most of the non-dealing desk brokers who provide price directly from the bank are having these 5 digits or 3 digits quotation pricing.
In case of 4 digit quotation 1 pip = 1 point.
Means if EUR/USD moved from 1.1350 to 1.1351 then change is 0.0001 i.e 1 pip.
In case of 5 digit quotation 1 pip = 10 points.
Means if EUR/USD moved from 1.13506 to 1.13516 then change is 0.00010. i.e 1 pip
If USD/CAD quoting at 1.1015 & market increased to 1.1020 then change is 0.0005 i.e 5 pips.
If USDJPY moved down from 112.50 to 112.30, then the difference is 0.20 or 20 pips.
Profit loss calculation:
How profit loss gets counted in terms of pips? Suppose a trader bought GBPJPY at 131.50 and 2 hours later, the market increased up to 131.70. Then the change is 20 pips, so the trader will earn 20 pips profit. If GBPJPY price fell to 131.10 then he will lose 40 pips.
Calculating pip value:
For the 4 digit and 5 digits brokers, these pip values differ. Pip value mainly depends on the account currency and lot size. Lot size means how much or the quantity of trade volume.
In forex, lot size starts from 0.01 (micro lot) to 100 or more.
Lot size also gets abbreviated as position size,
0.01 lot = 1000 units.
Calculate pip value with our pip value calculator.
Profit calculation examples
If you are trading EURUSD quoting at 1.2510 with a position size of 1000 units (0.01 lot), account currency in the US dollar.
Pip value would be 0.10 cents per pip.
If you make 20 pips profit. Then the monetary value of your profit will be 0.10 * 20 = $2.
If your buy position is at -40 pip loss,
then you will lose 0.10*40 = $4 etc.
If the account currency is in Euro, then the pip value with the same example above will be different.
It will be €0.08 in the euro.
The profit of 20 pips will be valued at 20*0.08 = €1.6.
With 40 pips loss will be valued as 40*0.08 = €3.2.
Check the pip value calculator to calculate pip value in different currencies.