WHAT IS A "PIP" IN FOREX?

Ask

Ask price is the lowest price the broker will pay to sell the instrument


Bid 

Bid price is the highest price the broker will pay to purchase the instrument.


Entry Price

Price at which your order (buy/sell) is executed.


Pip 

A pip is a standardised unit and is the smallest amount by which a currency quote can change. It is usually 0.0001 for U.S.-dollar related currency pairs, and 0.01 for Japanese yen related currency pairs


Pipette

A pipette equals 1/10 (one tenth) of a pip and it represents a fraction of 1/100,000 (one in hundred thousand).

A pip is a standardized unit and is the smallest amount by which a currency quote can change. It is usually 0.0001 for U.S.-dollar-related currency pairs and 0.01 for Japanese yen-related currency pairs since they go out to two decimal places.


For example, if the exchange rate of EUR/USD rises from 1.1343 to 1.1345, that 0.0002 rise in the value equals two pips.

On the other hand, since the Japanese yen pairs go out to two decimal places, the second decimal 0.01 is considered a pip.


For example, if the USD/JPY exchange rate rises from 109.74 to 110.74, it is said that USD/JPY has climbed by 100 pips.

Currency Pairs.png
Currency Pairs.png

To illustrate it better, let’s assume that we have a USD/CAD quote of 1.3262. As discussed before, what this quote tells us is that for 1 U.S. dollar, you can receive about 1.3262 Canadian dollars. Therefore, if there were a ten-pip increase in this quote (to 1.3272), the value of the U.S. dollar would rise relative to the Canadian dollar, as now 1 U.S. dollar would allow you to receive slightly more Canadian dollar, which in this example would be equal to 1.3272. To put it differently, now, one Canadian dollar would give you less U.S. dollar (1/1.3272=0.7534 USD).


USD/CAD = 1.3262

- 1 USD = 1.3262 CAD

- 1 CAD = 0.7540 USD (Simply flip USD/CAD to CAD/USD by dividing 1 over 1.3262)


USD/CAD= 1.3272 (+10 pips)

- 1 USD = 1.3272 CAD

- 1 CAD = 0.7534 USD


The effect that a ten-pip change has on the amount of base currency purchased, or of the pip value itself, depends on the units of base currency purchased.


For example, suppose a trader buys one standard lot (100,000 units) of U.S. dollar with Canadian dollar or, similarly, buy one lot of USD/CAD. In that case, the price paid will be 132,620 Canadian dollars ([1.3262] x 100,000), assuming the exchange rate for USD/CAD is 1.3262.


If the exchange rate for this pair experiences a ten-pip increase, and then the trader decides to conduct the same transaction, the price paid now would be 132,720 Canadian dollars ([1.3272] x 100,000) for the same one lot purchase of U.S. dollar.


In this case, due to a ten-pip rise in the exchange rate of USD/CAD, you have to pay 100 Canadian dollars (132,720-132,620) more to receive the same one lot of the U.S. dollar.

The pip value on a one-lot purchase of USD/CAD will be Can$ 10 per pip (100/10), which equals US$ 7.53 per pip.


Therefore, if the trader executed a one-lot buy earlier before the ten pip rise in the exchange rate, he would have saved 100 Canadian dollars. However, if he decided to execute a one-lot buy after the ten-pip rise, he would have paid 100 Canadian dollars more for receiving the same one lot U.S. dollar.


Now, if we assume the trader decides to sell a one-lot USD/CAD, it means that they are selling one lot of U.S. dollars and receiving Canadian dollars. Therefore, assuming the exchange rate remains the same as the example above, 132,620 Canadian dollars will be received for the sell of one lot or 100,000 US dollars.


However, if the same scenario happens and the exchange rate jumps by a ten-pip, then the trader decides to sell USD/CAD, he will receive 132,720 Canadian dollars for a one-lot U.S. dollar.


Now, if the trader purchases or sells a mini lot (10,000) instead of a full lot of U.S. dollar, a pip value would have been Cad$ 1 or US$ 0.75 for a mini lot transaction.


Therefore, the pip value increases depending on the amount of the underlying currency (in this case, U.S. dollar) purchased.


Read the next chapter for more details on pip value calculation for each currency pair and more examples on pip value calculation.


Summary:


  1. A pip is a unit of measurement for currency movement and is the fourth decimal place in most currency pairs.

  2. For the Japanese yen-related pairs a pip is considered the second decimal place.

  3. The pip value depends on the amount of underlying currency that is purchased.