VALUE OF A PIP

The most common increment of currencies is the PIP. If the EUR/USD moves from 1.2575 to 1.2576 that is one Pip. A pip is the last decimal place of a quotation. The Pip or POINT as it is sometimes referred to depending on context is how we will measure our profit or loss.

One pip is the smallest measure of price move used in forex trading. For instance, if the currency pair EUR/USD is currently trading at 1.2575 and then the exchange rate changes to 1.2585, the pair did a 10 pips (smallest units) move. The pip is the smallest measure regardless of the fractional representation of the currency exchange rate.

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As each currency has its own value it is necessary to calculate the value of a pip for that particular currency. We also want a constant so we will assume that we want to convert everything to US Dollars. In currencies where the US Dollar is quoted first the calculation would be as follows.

Example JPY rate of 110.43 (notice the JPY only goes to two decimal places, most of the other currencies have four decimal places)

In the case of the JPY 1 pip would be .01 therefore USD/JPY: (.01 divided by exchange rate = pip value) so .01/110.43= 1.1043 it looks like a big number but later we will discuss lot (contract) size. USD/CHF: (.0001 divided by exchange rate = pip value) so .0001/1.2036 = 0.00012036 USD/CAD: (.0001 divided by exchange rate = pip value) so .0001/1.1053 = 0.00011053

In the case where the US Dollar is not quoted first and we want to get to the US Dollar value we have to add one more step.

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EUR/USD: (0.0001 divided by exchange rate = pip value) so .0001/1.2875 = EUR 0.0000776 but we want to get back to US Dollars so we add another little calculation which is EUR X Exchange rate so 0.0000776 X 1.2875 = 0.0000999 when rounded up it would be 0.0001.

GBP/USD: (0.0001 divided by exchange rate = pip value) so 0.0001/1.8911 = GBP 0.0000528 but we want to get back to US Dollars so we add another little calculation which is GBP X Exchange rate so 0.0000528 X 1.8911 = 0.0000998 when rounded up it would be 0.0001.

By this time you might be rolling your eyes back and thinking do I really need to work all this out and the answer is no. Nearly all the brokers you will deal with will work all this out for you. They may have slightly different conventions but it is all done automatically. It is good however for you to know how they work it out. In the next section we will be discussing how these seemingly insignificant amounts can add up.

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