In the forex market, currency pairs are quoted with decimal points to represent the precise exchange rate between two currencies, helping traders to accurately assess even the smallest price movements in the market.
What is a pip in forex trading?
A pip, short for 'percentage in point,' serves as a unit of measurement to convey the change in value between two currencies.
The number of decimal places used in quoting a forex pair reflects the relative value between the two currencies involved. For most currency pairs, pips typically refer to the fourth decimal place (0.0001). For example, if the EUR/USD moves from 1.1015 to 1.1016, then it has increased by 1 pip. However, forex pairs involving the Japanese yen tend to be quoted with two decimal places (0.01) due to the yen historically having a lower value compared to other major currencies. For example, if the USD/JPY moves from 144.30 to 144.32, it has increased by 2 pips.
What is a pipette?
Despite forex pips equalling either 0.0001 or 0.01, brokers usually display quotes with either 5 or 3 decimal places. These additional decimal places are commonly known as ‘points’ or ‘pipettes’. For instance, if EUR/USD increases from 1.10161 to 1.10162, it signifies an increase of 0.00001 USD, and if USD/JPY increases from 144.323 to 144.324, it has an increase of 0.001. These small movements correspond to one pipette or one-tenth of a pip.
Pipettes are particularly useful when the price movement is minimal and when traders require a higher level of precision in their analysis.
How to calculate pip values
The monetary value of a pip varies depending on the trade size and the currency pair traded. Traders can estimate the pip value on their trades by using Deriv’s pip calculator based on the formulas mentioned below.
For direct currency pairs (where USD is quoted) like EUR/USD:
Pip value = point value x volume x contract size
For instance, trading 2 lots of EUR/USD has a pip value of 2 USD.
For indirect currency pairs (where USD is the base currency) like USD/JPY:
Pip value = (point value x volume x contract size) / exchange rate
For instance, if USD/JPY has an exchange rate of 144.324, trading 2 lots of USD/JPY has a pip value of 1.39 USD.
Understanding how pips work enables traders to gain a clearer insight into market movements, risk assessment, position sizing, and the overall impact of price fluctuations on their trading strategies. This knowledge empowers traders to make better informed decisions and manage their trades with greater precision and confidence.
Find out how pips work in a practice trading environment risk-free with a demo account.
Disclaimer:
The information contained in this blog article is for educational purposes only and is not intended as financial or investment advice.
